The Tycoon Report

Make Profits 'Emerge' With Global ETFs

Thursday, April 23, 2009 | Bob De Dea

Global investing is not just international; focusing on just a few countries outside of the United States does not a global portfolio make.

Expanding your investment universe must be ... well, a global effort. That is, you should look for opportunities in as many countries as viable. So, when fishing for global investments, we must cast a wide net to gain exposure to global growth.

Last week, we looked at some indices in order to get an idea of how to diversify a global portfolio. Today I'm going to go over creating a comprehensive portfolio from the Exchange-Traded Funds (ETFs) that track countries and indices.

Investing Far Away from the Comfort of Home

You may have concerns about the volatility of foreign markets. To put your mind at ease, I'll explain how diversification mediates volatility. Some U.S. sectors, for example, are more volatile than others. (Semiconductors, anyone?) But when these fast-moving segments are pooled into the larger U.S. market, the volatility flattens somewhat, because they make up just a portion of the total market.

In the same way, you reduce overall volatility when you spread the risk of nations globally and thereby diversify appropriately. Of course, when a majority of sectors dive, the entire market tanks. (A memorable example was Oct. 7, 2008, when all 46 subsectors were in the 10% column of the Investors Intelligence Industry Bell Curve).

But such a scenario is always short-term. Some sectors will certainly recover and the market will smooth out again, as we've seen recently, either by self-correction or intervention.

If you want to take a passive approach to global investing, you can simply purchase an ETF that tracks one of the indices mentioned in last week's report. Over the long term, you'd probably be fine. But if you, like most Tycoon readers, are an active investor, you can tweak your holdings to reflect your individual preferences to try to beat the benchmark. (Or, you can create your own portfolio that reflects the benchmark you choose that is currently without a representative ETF -- e.g., the Dow Jones Global Total Stock Market Index.)

You'll want to study the history, the strengths and weaknesses of the countries you're interested in. Based on your findings, you might overweight some and underweight others. Remember to establish both a core strategy and a counter one. (Or, as Chris Rowe puts it, play both sides of the market at the same time, in different sectors.)

Here are some ETFs to consider:

INDEX	NO. OF COUNTRIES	ETF
MSCI EAFE	21	EFA
MSCI All Country World Index	46	ACWI
MSCI All Country World Index ex-US	45	ACWX
FTSE World Index ex-US	46	VEU
FTSE All-World Index	48	VT
S&P Global 100 Index	100	IOO
Vanguard Emerging Markets Fund	25	VWO

However, if you're interested in modeling your own portfolio based on an established index, let's say you've already got a diversified developed countries portfolio (like the ACWI above). Here's an example of how to approach expanding that beyond developed countries. Let's take a look at the Vanguard Emerging Markets Fund:

Country Diversification (% of common stock) as of 3/31/09 of the VANGUARD EMERGING MARKETS FUND	Emerging Markets ETF (3/31/09)
China	19.00%
Brazil	14.30%
Korea	13.40%
Taiwan	11.70%
South Africa	8.00%
India	6.40%
Russia	6.20%
Mexico	4.60%
Israel	3.60%
Malaysia	2.90%
Chile	1.50%
Indonesia	1.50%
Thailand	1.40%
Turkey	1.30%
Poland	1.20%
Czech Republic	0.70%
Peru	0.70%
Philippines	0.50%
Hungary	0.40%
Egypt	0.30%
Colombia	0.20%
Argentina	0.10%

Again, the fund we're going to create is a complement to the developed countries fund.

First of all, we need a list of ETFs that would comprise a similar makeup. I've put one together (below):

Developed & Emerging-Market ETFs	Ticker
Australia	EWA
Austria	EWO
Belgium	EWK
Brazil	EWZ
Canada	EWC
Chile	ECH
China	FXI
Colombia	GXG
France	EWQ
Germany	EWG
Hong Kong	EWH
India	INP
Indonesia	IF
Israel	EIS
Italy	EWI
Japan	EWJ
Latin America	ILF
Malaysia	EWM
Mexico	EWW
Netherlands	EWN
Pacific except Japan	EPP
Russia	RSX
Singapore	EWS
South Africa	EZA
South Korea	EWY
Spain	EWP
Sweden	EWD
Switzerland	EWL
United Kingdom	EWU
Taiwan	EWT
Thailand	THD
Turkey	TUR

Now we can put together the lists to create a model portfolio.

In our example, we'll use $1 million as the base for our emerging-markets fund. Here's what our investments will look like:

Country Diversification (% of common stock) as of 03/31/2009 of the VANGUARD EMERGING MARKETS FUND	Emerging Markets ETF 3/31/09	ETF	Amount to Invest
China	19.00%	FXI	$190,000
Brazil	14.30%	EWZ	$143,000
Korea	13.40%	EWY	$134,000
Taiwan	11.70%	EWT	$117,000
South Africa	8.00%	EZA	$80,000
India	6.40%	INP	$64,000
Russia	6.20%	RSX	$62,000
Mexico	4.60%	EWW	$46,000
Israel	3.60%	EIS	$36,000
Malaysia	2.90%	EWM	$29,000
Chile	1.50%	ECH	$15,000
Indonesia	1.50%	IF	$15,000
Thailand	1.40%	THD	$14,000
Turkey	1.30%	TUR	$13,000
Poland	1.20%	N/A	$12,000
Czech Republic	0.70%	N/A	$7,000
Peru	0.70%	N/A	$7,000
Philippines	0.50%	N/A	$5,000
Hungary	0.40%	N/A	$4,000
Egypt	0.30%	N/A	$3,000
Colombia	0.20%	GXG	$2,000
Argentina	0.10%	N/A	$1,000

Obviously, some countries are without representative ETFs (those are listed in orange) and therefore the corresponding amounts must be distributed among other emerging countries (take your pick from the previous list).

Another way to weight your positions is through global sector ETFs. Here's a link to those offered by iShares (scroll to the bottom of the page).

There are myriad options to pursue in developing a global strategy (including specific categories like small-cap stocks, bonds, high-yield instruments, or other types of securities like Barclays' American Depository Receipts ETFs).

I hope by now that, armed with some basic information from this series of articles, you'll feel comfortable in exploring these options.

Happy hunting!






Bob De Dea
Guest Contributor
The Tycoon Report