Investing in Brazil highlights another wrinkle in using ETFs for foreign exposure: ETF blinders. Would-be investors in Brazil have an ETF, CEF and several ADRs available to them. I can appreciate that Brazilian common stock may not be right for many people. For them, there are a couple of alternatives: an ETF,
, and a CEF,
The Brazil Fund
The iShares Brazil has about 15 times the average daily volume of The Brazil Fund, yet The Brazil Fund has had better returns for one-, two- and five-year periods, has a slightly higher dividend yield and trades at a discount to net asset value. The Brazil Fund has a track record of better success than iShares Brazil (I realize this is backward-looking) but the ETF-only crowd would miss The Brazil Fund. Even if an investor still chose iShares Brazil, expanding the research process to include other types of products would lead to a more informed choice.
Managed ETF Products
Recently, several brokerage firms and banks have rolled out products that offer managed all-ETF portfolios to clients. I studied two,
Amerivest program and the
ETF Portfolio Builder, and found some significant disadvantages to them over just investing in ETFs outright.
In general, this group of products are computer-generated allocations of specific ETFs that attempt to capture a diversified portfolio. For most, investors complete a questionnaire that allows the program to establish an ETF portfolio based on risk tolerance and time horizon. The result will be a group of seven to 10 broad-based ETFs ranging from
iShares S&P 500
iShares Russell 2000
. But a computer-generated, automatically rebalanced portfolio that can assess only past performance of the ETFs in its stable of choices gives investors no forward-looking analysis, and that's a major negative.
What's more important, where the component ETFs have been or where they are going? Consider this simple analysis: Several strategists have said the next few years will offer below-average returns for U.S. equity markets. An investor who buys into this line of thinking may want to overweight dividends. That type of simple forward look hardly requires a CFA designation, yet a computer-run product can't offer even that much analysis.