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Investing Specialists

Weekly Wrap: Best International Funds, Dividend-Stock Deep Dive, and Why Diversification Is Getting Harder

Plus, our latest insights into the Russia/Ukraine conflict and the market.

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Russia/Ukraine Conflict and the Markets

As the war in Ukraine continues, our markets team and analysts have been working overtime to put the extraordinary events into context for investors. They’ve isolated funds with heavy weightings in Russian debt and those holding the most assets in Russian stocks. They’ve talked with top emerging-markets fund managers about their outlooks. They’ve examined why renewal energy stocks have surged along with oil prices

Morningstar U.S. market strategist Dave Sekera did his part, isolating 15 undervalued growth stocks amid the continued market volatility. What are Dave’s expectations for the market near-term? 

“Broadly, it is notoriously hard to predict how geopolitical events will evolve,” he reminds. “We expect stocks will remain volatile in the short term with brief sell-offs if further escalation arises, or a snap-back rally if Russia ceases further additional military escalation.”

To stay on top of the ever-changing conditions and what they mean for investors, bookmark and frequently visit our Special Report

The Best International Stock Funds

As 2022 kicked off, many market experts forecast a slowdown in U.S. stocks over the coming decade.  In fact, most expect better returns from non-U.S. companies in the next 10 years, given their relative underperformance: At 2021's end, the average U.S. large-blend fund had trounced the average foreign large-blend fund by more than 10 full percentage points annually over the trailing three-year period.

The Our Picks column this week takes a look at what Morningstar considers to be the best international-stock funds and ETFs. About two dozen funds have share classes that earn our top Morningstar Analyst Rating of Gold. The list includes both passive and active strategies, value and growth approaches, larger companies and smaller fare, and developed and emerging markets. 

How much international exposure does your portfolio need? That of course depends on your life stage and investment personality. But if you’re looking for a starting point, Morningstar’s Lifetime Allocation indexes include non-U.S. stock positions that range from 6% to 42%.  

Why Diversifying a Portfolio Is Getting Harder

I didn’t suggest that investors consider international funds for their diversification value. That wasn’t an oversight--it was intentional. As my colleague Amy Arnott pointed out this week in Why Diversifying Your Portfolio Is Getting Harder, correlations between U.S. and non-U.S. stocks have increased quite a bit during the past decade--meaning that returns for these two asset classes have moved largely in the same direction for much of the time.  

Indeed, Amy and colleagues Christine Benz and Emory Zink argue in their new diversification landscape paper that diversification as a theory may not be broken entirely, but there is evidence that correlations between stocks and bonds may rise during an extended period of rising interest rates and/or inflation. We’ll be unpacking more of this research in the coming weeks on Morningstar.com and talking with the team about their findings and key takeaways for investors. So don’t toss aside the concept of diversification--at least not yet.

Stock of the Week: Target

Shares of no-moat Target (TGT) jumped nearly 10% midweek after the company reported good sales growth for the fourth quarter and forecast low- to mid-single-digit revenue growth and low-single-digit operating income growth for fiscal 2022. Morningstar analyst Zain Akbari noted that we’ll be raising our fair value estimate of the stock by about 10% as a result. 

“The uptick is driven by a more optimistic outlook for Target’s near- and long-term top-line prospects, considering its burgeoning omnichannel strength, and the rescission of our prior expectation that the U.S. corporate tax rate would rise this year,” explained Zain. The retailer still hasn’t carved out an economic moat, though, because of the lack of switching costs and undifferentiated product assortment. Despite the fair value boost, shares look pricey as of this writing. 

Dividend-Stock Deep Dive: Energy

In our latest episode of Dividend-Stock Deep Dive, host David Harrell talks with Morningstar’s director of equity research for energy and utilities Dave Meats about dividend opportunities in the energy sector. As our colleague Lauren Solberg noted last month, the energy sector’s dividends are growing faster than other sectors in the U.S. market. And in the new episode of Dividend-Stock Deep Dive, Dave explains why and discusses the emergence of variable dividend policies among exploration and production companies. He also shares a few of his favorite names in the sector--perhaps providing some new ideas for a dividend-seeker’s watchlist. 

--Susan Dziubinski

Editor's Picks

Which Funds Had Heavy Holdings of Russian Debt?
With Russian bonds and the ruble collapsing, these emerging-markets funds had big weights ahead of the invasion.

How to Evaluate Medigap Plans
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Your Financial To-Do List for March 2022
Funding IRAs and HSAs are among this month's tasks.

3 Sectors With the Largest Fair Value Increases
High commodity prices boost oil E&P and basic-materials stocks. REITs show a quicker return to prepandemic occupancy levels.

In the Pursuit of Equality, Gender Lens Investing Can Help Tip the Scale
This investment strategy can positively affect society--and your portfolio.

15 Cheap Growth Stocks Amid the Volatility
Growth stocks are now broadly undervalued, and the overall market now looks fairly priced.

Quotas for Women Aren't Enough to Protect Against Human Capital Risks
Upward mobility is as important as board quotas and a diverse employee base.

Portfolio Planning and Personal Finance With Christine Benz

A Down-Market Survival Guide for Your 20s, 30s, and 40s
When you have many years until retirement, market volatility should be easy to shrug off, but it isn't always. A step-by-step guide to taking control.

Should You Derisk Your Portfolio?
Here's what to think about if you're heavy in stocks today.

Why Diversifying Your Portfolio Is Getting Harder
Spreading out your bets makes sense, but it doesn’t always pay off.

A Tax-Efficient Portfolio Makeover May Be Less Painful Than You Think
Proper accounting of cost basis is essential to avoid paying more taxes than you need to.

Mutual Funds and Exchange-Traded Funds

5 Great Active Equity Funds for Taxable Accounts
A variety of strategies can operate tax-efficiently.

Emerging-Markets Stock Fund Managers Face Tough Choices With Ukraine War
Here’s what managers of Morningstar Medalist funds are saying about the outlook for Russian stocks.

How Have Low-Volatility Funds Performed in 2022?
And are there any Morningstar Medalists in the group?

The Best International Stock Funds for 2022
These international mutual funds and ETFs all earn Morningstar Analyst Ratings of Gold.

More Market Turmoil Doesn't Deter ETF Investors in February
Exchange-traded funds hauled in $69.5 billion in a turbulent February.

3 Top Funds Losing Their Managers
Manager changes at Vanguard, Oakmark, and Fidelity in perspective.

Is ARK Innovation a Growth Fund or a Value Fund?
Cathie Wood says ARKK is a “deep value” fund now. But Morningstar’s data shows it's still a growth fund, just with stocks that are struggling.

Which Funds Have the Biggest Russian Stock Holdings?
Investors in these funds had the most exposure to Russia heading into the war.

Stocks

Dividend-Stock Deep Dive: Energy Ideas
'It's pretty clear that the market wants to see this industry return capital to shareholders.'

Why the Outlook for Wide-Moat Stocks Remains Bright
With valuations coming down, wide-moat stocks may be in a better position for a period of rising rates and inflation.

Attractive Yield Adds to 3M Stock's Appeal Today
Litigation fears are overblown for this dividend-paying conglomerate, says Morningstar's analyst.

Sustainability Matters

War May Delay Progress on Emissions Cuts, Chill Interest in Sustainable Investing
Even as U.N. panel finds globe is warming fast, oil prices climb.

The World Is Waking Up to Autocracy Risk Thanks to Russia, China
An interview with Perth Tolle, founder, Life & Liberty Indexes.

How MeToo Forced Companies to See the Business Risks of Sexual Misconduct
Change is slow but inevitable.

Sustainable Funds Have Lower Russia Exposure
But is it appropriate to invest in autocratic regimes at all?

Special Report: How Women Are Breaking the Bias in 2022
With women preparing to play a greater role in controlling wealth, here’s a look at the state of women and investing today.

The Short Answer

What Is a Market Correction? And What Happens Next?
Your market downturn and volatility questions, answered.

Policy

Are You Paying More in Fees Than Others for Your Retirement Investments?
It probably comes down to how big a company you work for.

The Long View Podcast 

Clark Howard: Financial Well-Being Starts With Being a Smart Consumer
The consumer advocate digs into buying homes and autos in a constrained-supply environment, mortgage paydown vs. investing, and why he loves target-date funds.

Rekenthaler Report

Why Economists Failed to Predict Inflation’s Return
Habit, selectivity bias, and groupthink.

The System Still Fails Small 401(k) Plans
Workers at companies with small plans are burdened by high costs.

Commentary

Does Race Play a Role in Retirement Readiness?
Results of the EBRI Retirement Confidence survey find demographic divides in retirement planning and confidence.

Winnie Chwang of Matthews Asia Tackles China’s Vast Market
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Why Do Women Invest Less Than Men? Blame the Income Gap
As women gain wealth, advisors must prepare to serve them.

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