Can single-country ETFs help save your portfolio from U.S. doldrums?
The investment world has been undergoing a change during this decade-long round trip to nowhere currently being endured by the
. The streak is currently about 10 years long, but the prospect of a round trip to nowhere for two decades isn't so far-fetched.
There is no way to know if this will be the case but with never-ending deficits, the economic ascension of countries like China, India and Brazil and the visibility for more commerce to be transacted away from the U.S. dollar it is possible.
This would make foreign investing all the more important and to that point I tried to construct a reasonably well diversified portfolio with a simplistic method using just single-country ETFs that might bail out U.S.-based investors if the trend of below-normal equity returns in the U.S. persists.
Those ETFs are:
Wisdom Tree Total Earnings ETF
iShares MSCI Canada
iShares MSCI Australia
iShares MSCI Germany
iShares MSCI Switzerland
Market Vectors Russia
iShares MSCI Taiwan
iShares MSCI Israel
iShares MSCI Brazil
SPDR S&P China
The funds were all equal-weighted at 10% of the portfolio. So, this would be 90% foreign and 10% U.S.
An obvious question would be: Why not just put a lot of money into
MSCI iShares EAFE Index Fund
instead of buying all of the above funds. EFA has 22% in the U.K. -- which, depending on what you read, may grow more slowly and face bigger economic problems than the U.S.
EFA is 19% in Japan, which has broken more hearts (how people every January say this is Japan's year?) than any investment destination I can think of as it continues to digest the excesses of the late 1980s.
Lastly, EFA is underweight a lot of important themes that could be big sources of outperformance, such as energy, Latin America, commodities and Asia.
One potential concern with any mix of funds is that the sector weightings will result in huge, and unintended, overweights and underweights vs. any normal benchmark index.
Luckily, that is not the case with the mix. The largest overweight was in the industrial materials sector with a 21.25% weight vs. 12.93% for the S&P 500. The other overweights were in the financial sector and in telecom. The underweights were in consumer goods, consumer services, health care and tech. Energy and utilities were equal weight.
The obvious drawback is the very heavy weighting to emerging markets; depending on where you think Israel fits, the portfolio is either 40% or 50% emerging. That's too much in the real world -- but surprisingly, the correlation between some of these funds is not that high.
The correlation between EWZ and EWT is only 0.654, GXC and EWT is 0.663, RSX and GXC is 0.676. The correlation does creep up a little between EWZ and GXC at 0.738 and with RSX and EWZ at 0.737.
The correlation issue is perhaps helped by the fact that EWT is mostly tech and GXC's largest sector is financials, but EWZ and RSX are each heavy in energy and materials.
As you might expect, with so much emerging market exposure, the volatility statistics are not great. The beta is 0.987. The standard deviation is 22.06, compared with 18.86 for the S&P 500 over the last 12 months (according to PortfolioScience.com).
The goal with the above mix is to have a diversified portfolio free of huge sector bets that gives a chance for normal equity returns if the U.S. continues to lag global markets.
This exercise just proves once again that investment products, like ETFs, can help investors create a diversified portfolio that captures very specific segments of the market sought after by the individual.
At the time of publication, Nusbaum was long EWA, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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