Choosing International ETFs

Domestic and international stocks and ETFs have started to shine since hitting a low on March 9, but how do you know which ones to choose?

With well over 700 ETFs being offered ranging from going short on gold to gaining exposure to Malaysia, some investors are overwhelmed by the smorgasbord of choices. When it comes to narrowing it down to international ETFs, the list still remains long. According to Simon Maierhofer of ETF Guide, there are 13 broad international equity ETFs, 26 regional ETFs, 42 country-specific equity ETFs, 32 international equity sector ETFs and 16 size-specific international equity ETFs. This could confuse anyone.

When picking an international ETF one thing to keep in mind is diversification. Emerging markets are known to be more volatile than the markets of developed nations, therefore one doesn’t want to be overly exposed to a specific region or country, unless, of course, that is your strategy.

When focusing on broad international equity ETFs, the vast majority play favorites to Japan and the United Kingdom. Case in point: the popular iShares MSCI EAFE Index ETF (EFA), which is down nearly 6.6% for the year, allocates 24.1% of its assets to Japan, 19.9% to the United Kingdom and holds 838 securities; 44% of its assets are allocated to two countries, talk about a lack of diversification.

On the flip side, the Vanguard FTSE All World-Ex US ETF (VEU), down for the year and allocates 17.5% of its assets to Japan, 14.4% to the United Kingdom and holds a whopping 2,167 securities - a much more diverse option. Exposure to Japan and the United Kingdom isn’t necessarily a bad thing; after all, they are both developed nations. Research indicates, however, that they move in tandem with the U.S. equity markets.

When it comes to regional ETFs, it is generally a good idea to steer clear from both Japan and the United Kingdom if looking long term. An ETF to take a look at here is the iShares MSCI All Country Asia Ex-Japan ETF (AAXJ), which tracks many of the emerging markets in Asia without any exposure to Japan. EPP is up 15.9% for the year and has crossed both of its 50- and 200-day moving averages.

In regard to country-specific ETFs, making a choice is up to the individual investor and the exposure he wants. As of now, China is a hot market because of talks that the nation may be able to pull itself out of a downturn by the middle of the year. An ETF to watch here is the iShares FTSE/Xinhua China 25 Index Fund (FXI), which is up 9.9% for the year, has crossed its 50- and 200-day moving averages.

At the risk of sounding like a broken record, when choosing ETFs, always look under the hood, utilize a strategy, stay diversified and keep up with current global economic news. Although these funds have crossed their trend lines, you always want to consider if they’re right for you and your goals, since everyone is different. If you want to track the performance of your ETFs, take a look at our ETF analyzer.

Kevin Grewal contributed to this article.

Comments

[Mad Hedge F...:]

Step carefully. We are gathering a head of steam towards our next financial crisis, even before the current ones are solved. The perpetrator will be new financial product du jour, the super leveraged Exchange Traded Funds (ETF’s), which are being created at a breakneck rate, sucking in billions of dollars from investors. ProShares has filed for 94 funds, which offer traders 300% long or short plays in markets as diverse as the Russell 1000 Index, the MSCI Malaysia Index, and the Nikkei 225 stock average. Direxion has gathered $3.4 billion with 16 different 3X funds launched since November. There are now more than 800 ETF’s, and I have been a big fan of those for emerging markets (EEM) and short Treasuries (TBT), which allow investors to take positions in niche sectors and foreign markets which are otherwise difficult or expensive to get into. These also allow mutual funds the only means to go short, and include tax advantages and hedging opportunities. But the leveraged versions include risks that most buyers don’t fully understand, even if they parse through the voluminous prospecti with a magnifying class. They promise their triple tracking only for the day you buy it. Beyond that, the tracking error can be huge. The mechanics of these funds force them to be buyers of every rally and sellers of every dip. Over time, leveraged short funds can actually suffer large losses, even in falling markets, and vice versa. It is just a matter of time before one of these goes to zero, wiping out investors. They are already being blamed for an increase in market volatility in the last hour of trading. Gaming sector ETF’s has become the new blood sport for nimble hedge funds. You can expect a replay of a movie you’ve seen before. At the first sign of trouble, liquidity will disappear, auditors will mark them down to nothing, and suddenly the whole world will be for sale. Sound familiar? You have been warned!

May 06 05:37 PM