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Written by: Advisor Asset Management
A laggard for over a decade, investor skittishness towards international equities has been apparent. While economic growth in Europe and China has been slow, recent government stimulus efforts are starting to have a positive effect. This opens a door for international equities and investors seeking exposure may want to consider a portfolio taking an innovation-driven, global approach such as the AAM Transformers ETF (TRFM).
Key Takeaways
- Improved macro sentiment for international equities. Year-to-date performance of international equity benchmarks has reflected this while the U.S. has been a laggard.
- The innovation-boom is global. A focus on U.S.-only stocks can omit companies with strong competitive advantages.
- Opportunities with international exposure. TRFM seeks to take a balanced approach by incorporating a modest international equity allocation.
Ready to Shine or Just a Layover?
Historically, after the S&P 500 index has experienced a year of 50 new highs, an accolade reached in 2024, the following year’s returns have been -2.9%, on average (Source: Ned Davis, 12/31/2024). A rotation toward international may be underway and its length may potentially be fundamentally driven. Meanwhile, macroeconomic sentiment has appeared to have improved for certain regions:
• Europe: Germany’s key economic sentiment indicator saw its largest increase in 2 years ahead of the recent election.1 The European Central Bank (ECB) has cut interest rates for the fifth straight time in March, loosening economic conditions for the Eurozone after two years of relatively stagnant growth and industrial production.2 Meanwhile, the IMF has forecasted the U.K. to have the third strongest real GDP growth for 2025, just short of the U.S. and Canada.3
China: The MSCI China index had an average selloff of -18.5% from 2021 through 2023 due to regulatory crackdowns and a lingering real estate
crisis (Source: MSCI). Today a rebound has occurred on the back of two major catalysts. In September 2024, the People’s Bank of China (PBOC) rolled out a significant stimulus package by lowering key interest rates while injecting approximately $137Bn of liquidity into the financial system.4 More recently, the rise of Deep Seek saw more than $1Tn in U.S. stock market, market capitalization, wiped out in one day.5
Source: MSCI Inc., S&P DJI Indices, as of 02/28/2025. Regions represented by the following: China, MSCI China Index NR; Eurozone ex. UK, MSCI EMU Index NR; United Kingdom, MSCI United Kingdom Index NR; Emerging Markets, MSCI Emerging Markets Index NR; Pacific Ex-Japan, MSCI Pacific Ex-Japan Index NR; Japan, MSCI Japan Index NR; Canada, MSCI Canada Index NR; United States, S&P 500 Index
Over the past five Fed rate cutting cycles since 1990, once the Fed has cut interest rates three times, the average global short-term interest rate (ex. U.S.) has typically fallen by 2% over the next 12 months (Source: Ned Davis Research, 2025). This is currently where the US easing cycle sits and may help drive the macro case for international equities further.
Hidden Gems or Just Another Souvenir?
The relative attractiveness of U.S. equities and their stretched valuations can be broken down into two key reasons:
1. Elevated economic growth where the U.S. continues to have the largest real GDP per capita of all G7 nations, plus China.
2. Operating margins of S&P 500 companies have been well above 11% over 8 consecutive quarters with an earnings growth rate that is expected to have its higher year-over-year growth rate since 4Q2021 (Source: S&P DJI, 2/26/25).
A focus on international firms that have elevated expected growth driven by a commitment to growing capital expenditures (capex) are likely to help drive future returns on invested capital.6 Most of this capex is well spent on research and development (R&D) in an effort to drive future productivity. COVID-19 started a global wave of innovation investing, while investments in artificial intelligence will likely continue to be the driver of R&D spending (Illustration 2).
Illustration 2 Ned Davis Research, as of 12/31/2024
TRFM: An Innovation-Driven Approach to Global Equities
AAM Transformers ETF (TRFM) seeks to take a globally agnostic and fundamentally driven approach to thematic growth investing. TRFM tracks the Pence Transformers Index, an index that screens the cohort of U.S.-listed companies, regardless of domicile. The index selection process considers fundamentals such as capital expenditures (capex), research and development spend (R&D), and forward-looking revenue growth. TRFM caps its international equity exposure at 25% upon a rebalance. TRFM’s international holdings are fundamentally attractive relative to its US holdings. This segment has had larger trailing sales growth over the last 12 months with higher forward EPS growth expectations. This demonstrates how the strategy has successfully isolated profitable, non-U.S. stocks.
Source: Ned Davis Research, as of 02/24/2025. Portfolio weights are rescaled for comparison purposes. International equity component does not include unsponsored ADR’s.
Conclusion
An allocation to TRFM isn’t just a tick on the portfolio diversification box. It can potentially serve as a thoughtful approach to global growth equity investing.
TRFM: Embrace the Power of Disruptive Innovation
As innovation can come from select aspects of our economy, investors require more precise tools to unlock future growth opportunities. TRFM offers a focused and specific approach in its selection process in seeking to uncover the most promising, transformative companies. The culmination of the investment process is the potential to gain exposure to companies prior to or during their strongest periods of growth.
Related: Corporate Earnings vs. Market Hype: What Really Matters
1. Martinez, Maria (2025, February 18) German investor morale improves ahead of election.\
2. Kiderlin, Sophie (2025, March 6) European Central Bank cuts rates again, says policy is becoming ‘meaningfully less restrictive.
3. Harari, Daniel (2025, February 13) GDP international comparisons: Economic indicators.
4. Interesse, Giulia (2024, October 09) Decoding China’s Recent Economic Stimulus Package: What Investors Need to Know.
5. Sor, Jennifer (2025, January 28) Deep Seek tech wipeout erases more than $1 trillion in market cap as AI panic grips Wall Street.
6. Nichols, Chandler (2024, November 11) AAM Viewpoints — Tax-Efficient Income and the Appeal of Thematic Growth as we Head into Year End.