Understanding Single-Country ETFs

Nov.12.06 | About: iShares MSCI (EFA)

Roger Nusbaum submits: There was an article in Barron's last Tuesday that quoted several different money managers opining about how much foreign exposure they have now or how much they plan to have in the future.

One advisor was quoted saying that, "her firm will not allocate more than 15% of a client's portfolio to one sector, including international, as a way to control risk." This seems like a peculiar comment to me. I count 22 single-country ETFs from iShares. Of the 22, twelve have a correlation of less than 0.60 to the S&P 500. I would say that risk control is the result of how a portfolio's components are blended, not whether a specific holding is volatile or not. Of the 20 single-country funds that existed from 1/1/2001-12/31/2002, nine outperformed the SPX, this during a particularly bad run for the U.S. market. Of those nine, seven outperformed dramatically.

The manner in which this person is quoted (here I am saying the above quote could be out of context) makes it seem like she really does not understand foreign investing or diversification. Assuming the quote was wrong and she does know, you will no doubt encounter people that may be looking to help you that don't know.

Here I think the onus is on you. It is not that difficult to learn the big macro for some other countries and to also learn generally how volatile those markets are, what makes them tick, how they correlate to the U.S. market and how they could incorporate into a portfolio.

If your plan is to manage your own portfolio I think you need to be willing to explore and learn about this sort of thing. I don't think you can just count on hiding out in iShares EAFE (NYSEARCA:EFA) either. It looks like it listed in summer 2001. From its inception until 12/31/2002 it dropped by the same amount as the S&P 500.

EFA has never been my first choice for foreign diversification. I own it for a couple of accounts where circumstantially it is what fits, but there are countless alternatives that are superior.