Willkommen, investors. Domo arigato for the cash.
Investors are piling into mutual funds that invest outside of the United States. The lure of Japan's soaring market, Europe's nascent economic recovery and the potential for stronger economic growth in developing economies have led investors to pour a net $91 billion into world stock mutual funds through the first eight months of the year. That's nearly six times what they've put into domestic stock mutual funds, according to the most recent data from the Investment Company Institute.
It's a continuation of a trend that's been going for years, both by average investors and by mutual fund providers, in the search for a more diversified portfolio. Stocks from other countries can zig when U.S. markets zag, offering a smoother ride for investors.
That's why fund companies have bulked up on foreign stocks in their target-date retirement funds, which are built to take care of investment decisions for savers. The average target-date fund designed for those aiming to retire in 2040 had 36% of its stock portfolio in foreign companies at the end of 2012, up from 24% at the end of 2005, according to Morningstar.
The split in interest has become even more pronounced in recent weeks: Investors added a net $924 million to world stock funds during the two weeks ended Oct. 2. Over the same time, they turned their backs on domestic stock funds and pulled out a net $8 billion.
One attraction has been the bigger dividend yields that foreign stocks offer. Stocks from developed markets around the world carried a dividend yield of 3.1% at the end of September, according to the MSCI EAFE index. Stocks from Brazil, China and other developing economies in the MSCI Emerging Markets index had a yield of 2.7%. That compared with a 2.15% yield for the Standard & Poor's 500 index and a 2.6% yield for a 10-year Treasury note.
Investors who bet on Japanese stocks have done well this year. A big push of stimulus by the Bank of Japan has invigorated the country's market, and the country's Nikkei 225 index has surged 37% this year.
But even better buys are available in Europe, where stocks have lagged the U.S. market since the recession.
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