This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Keep Shopping Overseas

With the stock market wobbling, many investors are paying more attention to fixed-income investments and reducing international equity exposure.

But it's an excellent time to add international holdings -- provided you understand the risks and content of what you're buying.

Human resources and consulting firm Hewitt Associates reports that 401(k) investors poured about $3.2 billion into international and emerging market equity funds between January 2003 and April 2006. At the end of April, the typical 401(k) account had about 7.93% of its assets in international equity.

However, 401(k) investors began reducing their international exposure in May as the stock market swooned. At the end of June, the typical 401(k) account had only 6.77% invested in international funds and another 0.74% invested in emerging markets -- a decline in total equity exposure to 7.51%, according to Hewitt. During June alone, more than a quarter of a billion dollars of 401(k) money moved out of international and emerging market equity funds -- and most of the net transfers were fixed-income bound.

Investors are right to be cautious about emerging market funds, which have been producing red-hot returns that aren't sustainable. But investors looking for a "safe harbor" and exiting from international funds of all kinds are cutting themselves off from good investment opportunities. And the exodus out of these funds is creating a buying opportunity.

Emerging Concerns

First, let's take a look at two emerging market index funds. As of mid-July, the (VEIEX) fund is up 6% year to date and 29% over the past 12 months, according to Morningstar. The iShares MSCI Emerging Market Index (EEM) exchange-traded fund is up 4.5% for the year to date and 25% for the past 12 months.

These funds have diversified exposure in emerging markets, typically with somewhat higher concentrations in South Korea (18% to 20%), Taiwan (11.2% to 16.6%), South Africa (11.5% to 13.2%), Brazil (8% to 11%) and Hong Kong (8% to 10%).

Emerging markets investments have been on a tear for the past three years -- Vanguard's emerging markets index, for example, produced a three-year annualized return of over 32% -- and that kind of performance simply is not sustainable. And, indeed, many emerging market, China and Latin American-focused funds have begun to correct.

But current pricing is inflated. Emerging market investments should be long-term holdings in every portfolio, but wait until the speculative froth blows off. If you go in now, you'll be "buying high" and setting yourself up for a downdraft.

Foreign Flair

There are, moreover, other international indices with no, or only limited, emerging market exposure.

International Appeal
Symbol Fund or ETF P/E Dividend Yield Performance (as of July 13)
YTD 12-months
EFV iShares MSCI EAFE Value Index n/a n/a 9.32% n/a
EFA iShares MSCI EAFE Index n/a n/a 8.28% 22.33%
VDMIX Vanguard Developed Markets Index 15.1 2.7 8.62% 22.71%
FSIIX Fidelity Spartan International Index 15 3 8.59% 22.77%
VGTSX Vanguard Total International Stock Index 14.4 2.8 8.20% 23.48%
SWINX Schwab International Stock Index 14.6 2.9 8.88% 21.53%
Source: Morningstar

Compared to emerging market indices, these particular index and exchange-traded funds have slightly varying amounts of exposure in the stocks of Japan (22% to 25%), the U.K. (20% to 24%), France (8% to 10%), Switzerland (6% to 7.5%) and Germany (6% to 7.6%). Only two -- Vanguard's (VGTSX) (which I hold) and Schwab's (SWINX) -- have small amounts of emerging market content. All of the others are focused on developed markets, albeit with rather small allocations to Singapore and Hong Kong.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
EEM $32.79 0.00%
AAPL $93.21 -0.44%
FB $117.80 -0.22%
GOOG $701.26 0.80%
TSLA $211.34 -5.00%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs