Although a dramatic outperformance in many foreign equity markets last year has led to an enormous flow of cash into global stock funds, Standard & Poor’s believes such gains may substantially moderate in 2006.

Alexander Young, Standard & Poor’s equity market strategist, said that while stock markets in Japan, Latin America, and the Asia-Pacific regions will likely remain strong this year, they may fall below last year’s gains. For example, Standard & Poor’s expects the S&P Euro 350 index to slip 2% this year and the the S&P Topix 150 index, which comprises a broad array of highly liquid securities from each major sector of the Japanese market, to gain 5%.

Meanwhile, Standard & Poor’s sees the possibility for U.S. large-cap stocks offering the best value in 2006, based on “respectable” earnings per share growth of 11% and U.S. GDP growth of 3.3%. The S&P 500 index is expected to show a 9% rise for the year.

Young also cautions that money flows are often a lagging indicator. “It usually happens when the money’s already been made” in a given market, he said, and investors are “chasing performance.” Based on this outlook, investors who want to hedge their bets by investing simultaneously in the U.S. and foreign markets while holding onto the relative security of the largest-cap companies might want to consider global mega-cap exchange-traded funds (ETFs).

The streetTRACKS Dow Jones Global Titans ETF (DGT) is based on a 50-stock index provided by Dow Jones. Managed by State Street Global Advisors, between 60%-65% of the index by market cap weight is parked in U.S. issues, 15% is in U.K. stocks, and the remainder is in European, Japanese, and South Korean holdings.

The $405-million iShares S&P Global 100 Index Fund (IOO) comprises 100 stocks designed to measure the performance of large transnational companies that are of major importance in global markets and which have a minimum market cap of $5 billion. Issued by Barclays Global Advisors, the fund’s holdings are concentrated in the U.S., U.K., Europe and Japan, although its American holdings represent 50% of the index by market cap.

Currently, Standard & Poor’s recommends putting 20% of one’s portfolio into international stocks. When it comes to global stock funds, investors should beware of fees. The expense ratio for the average global equity fund is 1.46%, giving investors a reason to shop around. However, these two ETFs carry expenses that are one-third the cost of actively managed funds. Over time those savings can add up — provided investors are getting the kind of exposure and returns they want.

However, both of these ETFs have reported less-than-stellar returns for the recent three- and five-year periods, reflecting the U.S. market’s downturn of 2001-03. For the three-year period through Jan. 31, 2006, the iShares S&P Global 100 Index Fund gained 17.0%, versus a 22.2% rise by the average global equity portfolio. For the five-year period, the iShares fund dropped 0.7% annualized, while the peer group climbed 3.0%. The streetTRACKS ETF gained 13.3% and lost 2.1% over those periods, respectively.

Additionally, Standard & Poor’s index strategist Srikant Dash cautions that neither of these ETFs offer true diversification away from the S&P 500 large-cap companies because of their significant stakes in U.S. stocks. Moreover, because the indexes are market-cap weighted, the top 20% to 30% of the global indexes will be similar to the 500 index.

Indeed, the StreetTRACKS ETF has had a near-total correlation of 0.99 with the S&P Global 100 Index for five years, said State Street spokeswoman Patricia Sanchez-Marin. “The biggest names drive most of the performance,” she said of the index.

Sanchez-Marin sees the ETF as a long-term core holding, alongside “satellite” investments such as small-cap and emerging market stocks to boost returns. She also points to other advantages of the ETF in general, such as giving investors the option of shorting, and doing so during a downturn, which is not permitted for individual stocks.

Dash sees the ETFs as appropriate for investors who believe that global mega-cap stocks are poised for a comeback. Such investors can acquire a whole basket of securities in a single trade. But “there’s not much difference” between the two ETFs otherwise, Dash noted, apart from a slight edge in expense ratio for the iShares, and greater concentration in the StreetTRACKS. For those seeking “purer exposure” to international markets, Dash regards ETFs based on indices like the S&P Europe 350 and Topix 150 indices as better vehicles.

Key Statistics

iShares S&P Global 100 Index Fund (IOO)

streetTRACKS Dow Jones Global Titans ETF (DGT)

Assets:

$405.1 million*

$86.7 million*

Avg. Market Cap:

$76.4 billion**

$170.7 billion*

U.S. Exposure:

50.3%**

63.1%*

Expense Ratio:

0.40%

0.50%

3-Yr. Ann. Return:

17.0%

13.3%

Inception:

12/2000

9/2000

S&P rank:

2 Stars

1 Star

*Data as of 2/23/06 **Data as of 12/30/05