International funds sail past U.S. stock funds

• Global X FTSE Greece 20 ETF up 27%25 in the third quarter
• iShares MSCI Spain Capped ETF%2C up 25%25 the past three months
• Average international small/midcap growth fund up 11.6%25 for the quarter

If you sent your money abroad in the third quarter, you probably had a good return — unless your cash went to an emerging market.

The average large-company core international fund gained 10.6% in the third quarter, vs. 7.3% for the average diversified U.S. stock fund and 5.2% for the Standard & Poor's 500-stock index with dividends reinvested.

What was behind the index? Europe. According to MSCI, which keeps tabs on international stock markets, Europe's stock markets gained 13% the three months ended Sept. 30. "Europe has reached the bottom of a double-dip recession," says Ned Gray, chief investment officer — global and international value equity, for Delaware Investments.

Countries in the eurozone — the 17 countries that use the euro as a currency — rose 15.8% in the third quarter. The biggest winner was formerly the eurozone's biggest loser: Greece, up 32.8%. Spain, another problem country in the eurozone, saw its market rise 25.1%. "Concern about the eurozone flying apart has gone into quiescence," Gray says. "Investors have a reasonable assurance that regulators have woken up and are paying attention."

Some non-eurozone countries also fared well. Finland's stock market soared 26.6%, according to MSCI, and the Nordic countries as a whole jumped 15.5%, despite Norway's 8.6% rise.

The rest of the world was a mixed bag:

• Japan, up 6%. The weaker yen has helped Japan's vital export business, and the country could be rising out of a decades-long deflationary recession.

• Australia, up 10.4%, helped in part because it benefits from a reviving Chinese economy.

• Canada, up 8.2%, helped by strong oil and gas exports.

The emerging markets, however, remained a mixed bag. The BRIC countries — Brazil, Russia, India and China — gained 7.9% in the third quarter, restrained by India's 5.7% swoon.

India, for example, saw its stock market fall 5.7%, and Indonesia's stock market plunged 24.1% in the third quarter. But Chinese stocks soared 11.5% as consumer spending began to pick up again.

Most international markets had a tail wind: currency. When the value of the U.S. dollar falls, investors get a boost from currency conversion. For example, Austria's stock market gained 13.6% when priced in euros. For U.S. investors, the currency effect boosted that gain to 18.3%.

Delaware's Gray thinks there's still value in Europe. European stocks, which normally sell for lower price-to-earnings ratios than U.S. stocks, are cheap by European norms, he says. (The price-to-earnings ratio is a stock's price divided by its earnings per share. Lower is cheaper.) "Depending on what markets you look at, European stocks are either moderately or dramatically undervalued," he says.