More Evidence That 'Risky' Foreign ETFs Are Less of a Gamble than U.S. ETFs

I remember when I first began to think that U.S. economic dominance was waning. I lived in Taiwan at the time, and things in Asia were moving with surprising speed.

First came the '87 crash, which had me questioning U.S. stock market stability. Thereafter, the S&L banking crisis solidified my fears that the "#1 economy" was falling apart. (Note: Ross Perot was amusingly persuasive with those charts too!)

The end wasn't near, however. The U.S. shrugged off the '91 recession. Consumers began spending freely on their credit cards again. Meanwhile, state and federal governments didn't see a need to spend less either.

I was wrong about U.S. economic rule. Or at the very least, as financial folks like to say... I was "early."

In the mid-80s, I expected that China would be the next economic powerhouse by the mid-90s. As it turns out, China did not vault to the top spot in the mid-90s or even after the dot.com collapse in early '00.

But right now? Post-2008 financial catastrophe? With GM and Chrysler declaring bankruptcy in '09, and the entire "bank concept" still in the process of revision?

Several weeks ago, I acknowledged that if push came to shove, I'd choose a China ETF over a U.S. ETF. A few days later, I explained why I believe emerging markets may be safer than developed markets. Quite a few readers sent me e-messages with nods of agreement.

It's not that the iShares Emerging Markets Fund (EEM) isn't "overbought." It is. Yet a high growth investment like EEM isn't going to retest 2008 lows. After all, emerging markets set "higher lows" in March of 2009, unlike developed world ETFs like the iShares S&P Global 100 (IOO); the latter set "lower lows" in March of 2009.

Now there's more evidence regarding risk and reward. For example, over the last 4 weeks through the end of May, the iShares Emerging Market Fund (EEM) picked up 16%. The S&P 500 SPDR Trust (SPY) picked up 2.4%. Yet EEM was only 1 1/2x as volatile with respect to beta.

Assume for a moment that the volatility has been roughly the same for the first 5 months. I am sure it's pretty close. What you get for 1.5x risk with EEM is 33% YTD versus <2% for SPY.

If safety resides with the countries that stand the best chance of thriving post-recession... if we are counting on "green shoots"... it's China that has the manufacturing pick-up on direct spending on infrastructure. Again, 75% of China stimulus is going to infrastructure, whereas 5% in U.S. stimulus spending is going to "rebuilding America." You should consider the China 25 Index (FXI) during pullbacks.

Similarly, it's Brazil's middle class that is spending more freely; Americans are saving more... a good thing, but coming at the expense of consumption. You should consider Market Vectors Brazil Small Cap (BRF) to capitalize on Brazilian consumer spending.

The U.S. economy is better off than it was 6 months ago. And it'll be better off 6 months from now. Yet we already need to consider how massive debt and higher inflation may contribute to an exceptionally slow-growing, stagnant environment. Some feel we may even face the dreaded double-dip recession.

To the extent that you need "beta" in your portfolio, you'll still have developed market exposure. Alpha seekers, on the other hand, are already reevaluating the meaning of playing it safe.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Gravity404:]

These are definitely great ways for investors to diversify. I’m a contrarian stock picker and rarely buy ETFs and hardly ever MFs. But, when I saw BRF come out a few weeks ago; did some research (posted a few queries on SA too) I thought it was an excellent play. I’m glad I pulled the trigger. Even though I'm up over 15 percent in 10 days, I'm going to hang on to this one for a while.

Jun 02 08:42 AM

[Danny Furman:]

Any investor who hasn't decoupled from US dollar assets is treading thin water. Make the moves before the bottom falls out. Asian companies are reporting growth and profits while we are excited for slightly better than apocalyptic reports.

Jun 02 09:06 AM

[lorddarley:]

I've written previously about BRF. The government has plenty of room to lower 10% interest rates, and it will have to do that. The capital inflows are staggering, and the real will impede export sales unless the government takes steps to weaken it. That means lower rates , a great plus for the Brazilian consumer who has incresed purchasing power. BRF has a large component of consumer stocks. Sometimes, "overbought" stocks go higher just because the story makes sense.

Jun 02 10:11 AM

[RiskReturnO...:]

EWT may be the best risk-reward, as you get the China exposure, with the "safety" of a long track record of a developed stock market.

Jun 02 10:34 AM

[chirs$wallst:]

well put


On Jun 02 09:06 AM Danny Furman wrote:

> Any investor who hasn't decoupled from US dollar assets is treading
> thin water. Make the moves before the bottom falls out. Asian companies
> are reporting growth and profits while we are excited for slightly
> better than apocalyptic reports.

Jun 02 10:59 AM

[AndrewBaker:]

It makes sense at this time to buy assets in currencies other than dollars, given that the dollar is on a downward path. When the correction comes, do note that the emerging markets will correct more sharply than the US, so you will need those dollar gains to form a cushion against the falling prices. Myself, I set stop-losses such that I should sell before it gets too bad, but we all know that it isn't easy when you like a stock so much, and also markets, especially emerging ones, can move very fast.

Jun 02 12:03 PM

[John Christy:]

A lot of investors routinely confuse "exotic" or "volatile" markets with "risky" markets. Asia, Latin America, etc. are all exotic, unfamiliar markets for many Americans. And they are certainly volatile. But that does NOT make them inherently more risky. In fact the biggest risk you could have taken over the past 10 years was to keep all of your equity exposure in the US. There's no reason to think this will change in the next 10 years.

Jun 02 12:49 PM

[HaavBline:]

Good advice.

But this should have been evident for quite a few years for any American who dare to venture out and challenge conventional wisdom.

Jun 02 02:24 PM

[Ankit Gupta:]

I agree that volatility doesn't always correlate to increased risk, but I think the reason most focus on the US is that we live here, we know the language, we know what the SEC does and doesn't do, and we can see the world around us.

Would I be willing to buy a dry cleaning business in China having never been there, not knowing the language, and not knowing why it's a good place to have my money compared to some town in Africa?

Investing abroad isn't bad by any means, but it might be outside the circle of competency of people. At least for me, it's outside of what I understand.


On Jun 02 12:49 PM John Christy wrote:

> A lot of investors routinely confuse "exotic" or "volatile" markets
> with "risky" markets. Asia, Latin America, etc. are all exotic, unfamiliar
> markets for many Americans. And they are certainly volatile. But
> that does NOT make them inherently more risky. In fact the biggest
> risk you could have taken over the past 10 years was to keep all
> of your equity exposure in the US. There's no reason to think this
> will change in the next 10 years.

Jun 02 06:45 PM

[doubleguns:]

Your name implies your ancestors are from India. You should ask them about the home country and get some understanding about the home land. It is becoming a great place to invest.


On Jun 02 06:45 PM Ankit Gupta wrote:

> I agree that volatility doesn't always correlate to increased risk,
> but I think the reason most focus on the US is that we live here,
> we know the language, we know what the SEC does and doesn't do, and
> we can see the world around us.
>
> Would I be willing to buy a dry cleaning business in China having
> never been there, not knowing the language, and not knowing why it's
> a good place to have my money compared to some town in Africa? <br/>
>
> Investing abroad isn't bad by any means, but it might be outside
> the circle of competency of people. At least for me, it's outside
> of what I understand.

Jun 03 07:08 AM

[buyitcheap:]

How does the author address the prior meltdowns of some of these foreign markets, ie. Singapore, Brazil in the late 80s, etc. where you had massive downturns at a rapid pace? hedging?

Jun 03 07:18 AM

[rick12345:]

One word, "savings".
It's only when the japanese banking system adopted western style lending practices of giving money to any fool with a half baked idea that the financial system collapsed. Asset and commodity prices don't go up forever, and this is why it is always smart to hold strong reserves, just in case the good times turn sour. I suppose it goes back to the old mentality of "don't invest (lend) more than you can afford to lose". Perhaps what we really need to do is to incorporate more sociology into the business courses run by universtities and colleges. At least this way, professionals may gain a better understand and/or insight into current and future trends before they endulge in a hefty buying/spending (borrowing/lending) spree.
What we are experiencing now happened in Asia 10 years ago. Did we learn anything from their experience? Not one scintilla of wisdom; We therefore deserve everything we presently face.

Jun 03 08:28 AM