Do Economic Freedom Rankings Predict ETF Investing Success?
NEW YORK ( ETF Expert) -- Recently, Carl Delfield of Investment U, suggested that investors would reap the financial rewards of owning an equally weighted portfolio of "economically free" countries.
The author offered the most popular country ETFs of economically free nations.
Philosophically, I might agree with Delfield's contention that such a portfolio would prove profitable.
In fact, very few individuals are as big fans of economic independence as I. In the early '90s, I chose to live in Hong Kong for several years because of its free-market capitalism and flat tax rate. What's more, I traveled back and forth to Singapore, enamored by its probusiness policies and support of free trade.That said, one should question whether high ratings of economic independence constitute reason enough to invest in a corresponding country's ETF. Moreover, one should be wary of buying and holding any basket of assets, especially when there are beneficial ways to control your investment outcomes. For 2012, Hong Kong, Singapore and Australia earned the top three spots in the The Wall Street Journal/Heritage Foundation's Index of Economic Freedom. Below is a quick chart view on how an investor might have done owning and holding iShares:MSCI Hong Kong (EWH), iShares:MSCI Singapore (EWS) and iShares:MSCI Australia (EWA). An optimist might note that the five-year bear-to-bull environment resulted in recovery of principal. On the other hand, the ETFs that track Malaysia (ranked 53rd in the index), Mexico (ranked 54th) and South Africa (ranked 70th) performed dramatically better, and with arguably less risk. The following chart shows the performance of iShares:MSCI Malaysia (EWM), iShares:MSCI Mexico (EWW) and iShares:MSCI South Africa (EZA). The "takehomes" here are simple. First, there is no single indicator (e.g., "Economic Freedom," unemployment levels, tax policies, GDP, interest rates, oil prices, inflation, etc.) that can definitively provide you with the best investment portfolio. You need to include a variety of data points -- fundamental, technical, contrarian, economic, historic -- when selecting ETFs. Second, and perhaps most important, you need one or more mechanisms to control the outcome of your investment decision. For example, you might select EWH because of economic independence, impressive employment statistics, a "soft landing" in China and favorable technical uptrends. (See chart below.) And yet one disastrous turn in Europe could potentially send EWH into a tailspin. Therefore, in order to guarantee that your purchase of EWH leads to a big gain, small gain or small loss, use appropriate stop-limit losses and/or hedges. You can listen to the ETF Expert Radio Show "LIVE", via podcast or on your iPod. You can follow me on Twitter @ETFexpert. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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