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Dion's Weekly ETF Blog Wrap

Look Abroad to Hedge the 'New Normal'

Published 7/20/2011 2:00 p.m. EDT

Is the developed world about to enter a period of sluggish economic growth coupled with inflation? This toxic combination, known as stagflation, is frequently used to describe the economic conditions that prevailed in the U.S. during the 1970s and early 1980s.

In March 2009, as the financial markets were still reeling, bond guru Bill Gross, the co-founder of PIMCO, coined the term the "New Normal" to characterize what he thought would be a similar period of slow growth and high inflation in the developed world. According to Gross, the New Normal will include diminishing returns on U.S. equity and a declining standard of living for most Americans.

While Gross's vision is undeniably gloomy, there is a silver lining. The crucial difference between the stagflation of the past and Gross's New Normal is that formerly underdeveloped nations such as China, India and Brazil have been booming for years. Even as the rate of economic expansion slows in those countries, nations such as Vietnam, Cambodia and the so-called frontier countries of the Middle East and North Africa, are taking up the growth mantle.

Most important, investors can easily and inexpensively incorporate international exposure into their portfolios using exchange-traded funds and other exchange-traded products.

I'm generally bullish on Southeast Asia, and I hold the iShares MSCI Malaysia Index Fund (EWM) and the iShares MSCI Indonesia Investable Market Index Fund (EIDO) in client portfolios.

Closer to home, I also like Mexico and I use the iShares Mexico Investable Market Index Fund (EWW) for exposure there.

The common thread running through all three positions is the rapidly growing emerging-market consumer-demand story, which I believe will be one of the most important investment themes for at least the next decade.

Fund sponsors are constantly rolling out new products to meet emerging-markets investors' needs. There's even a firm, Emerging Global Advisors, that focuses exclusively on the emerging markets space. The Emerging Global Shares Dow Jones Emerging Markets Consumer Titans ETF (ECON) is a well-diversified fund with heavy weightings in Mexico (21%), Brazil (16.8%), South Africa (14.5%) and India (10.5%). This fund is a good buy-and-hold option for investors looking to boost their emerging-markets exposure.

At the time of publication, Dion Money Management was long EWM, EIDO and EWW.

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