Single Country ETFs Revisited: A Detailed Analysis

Roger Nusbaum submits: The recent post on foreign investing drew some good comments and questions.

A reader asked what I thought was superior to iShares MSCI EAFE Index Fund ETF (EFA); he said he was hiding out in EFA, iShares MSCI Emerging Markets ETF (EEM) and iShares Canada. First, I was probably too brief on this point. For people that are inclined to put the time in, which is not easy or right for everyone, I think the foreign portion of a portfolio can be assembled to yield much more than EFA and offer lower correlation. EFA has a 0.81 correlation to S&P 500 Index (SPY). Personal- and client-holding iShares Australia (EWA), a theme I have been writing about forever, has a 0.48 correlation to SPY. Long time readers know I am a fan of Ireland as an investment destination. There is a CEF for Ireland with ticker New Ireland Fund Inc. (The) (IRL) (no position); it has a 0.25 correlation to SPY. I have liked Norway for a while, and although there is no fund (that I am aware of), I have disclosed owning Statoil (STO) personally and for clients. STO has a 0.43% correlation to SPY. One more example; I have been writing about Sweden a lot this year. iShares Sweden (EWD), no position, has a 0.68 correlation to SPY. EWD's correlation is higher than the others but still lower than EFA.

Only STO is lagging EFA. It was way ahead earlier in the year, as you might expect, and now trails by a hair, although maybe not after accounting for the dividend.

I didn't even mention any of the broad-based WisdomTree funds (no positions in the broad-based ones) which I think will be better performers than EFA for investors that would rather not take single country risk. These folks might also want to consider an actively managed OEF instead of EFA.

TomK thinks EFA is a good hold. It obviously is a popular offering; I just think there is better diversification to be had.

One reader thinks exploring correlation is useful (agreed) and asks where this can be found. I use PortfolioScience.com which costs about $20 per month. The information is good but the actual site is very temperamental. A couple of readers left a link that Charles Kirk found from the SPDR people that I have not looked at yet which is free, as I understand it.

In the post in question I said that I found the quote in Barron's about no more 15% in any sector, including foreign, to be peculiar. A reader left a comment saying they agree with the quote to an extent. He believes that treating foreign as sector is correct but does not think 15% is enough in foreign. I can't say he is wrong of course, but I view it differently. For example when I look at how I want to capture a sector I look for what I think is the best way to do it. Here I am talking sectors that make up the S&P 500. With energy, for example, there are various countries that I think are better for clients than the U.S.. With staples I view Diageo (DEO) as a great way to capture staples and the UK. The point is that I think it makes more sense to integrate foreign into the sectors and not view it as a standalone. I think that when viewed as standalone, the chance of lopsided sector weightings increases.

Another reader thinks most of an investor's assets should be in foreign stocks because of the state of the U.S. economy. He says that for every good domestic stock there is a good foreign stock to match, he cites Total (TOT) instead of Chevron Corp. (CVX). Well, maybe. Here again, what is the best way to capture different parts of the market? What is best today may not be best in the future. I would tell this person to be cognizant of this point.