Narrow Exposure Getting Easier to Implement

by: Roger Nusbaum

In keeping with the theme of efficient investing (fee-wise), there is a tie-in to new ETFs that occurred to me. In response to my saying yesterday that in some accounts I use a broad foreign fund that avoids Europe and Japan, a reader asked if I meant a fund that targets Australia ... which is indeed the case, but it is not the only developed market I like.

A while back I mentioned a filing for the Guggenheim ABC High Dividend ETF; this is still a filing and may never become a fund. The "A" in the name stands for Australia, "B" for Brazil, and "C" for Canada. If it also included Norway it would cover a lot of bases, but still the three make for a very good combo in terms of foreign exposure that avoids Europe and Japan. Additionally, the fund could also cover emerging markets for anyone willing to own Brazil as a proxy for all of emerging.

So someone with an account at Schwab (NYSE:SCHW) could buy SCHB and SCHA (we own both for some accounts) for domestic exposure and this ABC ETF for both developed and developing foreign for $9 in commission, while having actively avoided parts of the world that -- even if you don't think the fundamentals stink -- you are at least buying countries with more diverse fundamental attributes (commodity-based countries versus the U.S., being service based).

This grouping would provide better diversification, in my opinion, than something like EFA for the reasons stated above ... but would of course make the portfolio more vulnerable to meaningful commodity price declines. As the ABC fund is just a filing, we don't know what will be in it, but if it is heavy in Brazilian banks then it might make the idea less appealing. This from the FT (subscription required) talks about the potential for a subprime crisis in Brazil.

"Subprime" is not the right word in my opinion, but that the country could be over-indebted as a middle class ascends is easy to envision and a big reason why I've never been very hot on the Brazilian banks. They might do very well, but will do so without me. If the ABC fund was 5% Brazilian financials, then I would not be overly concerned. At 20%, I would absolutely stay away.

The point here is really about the evolution of cost-efficient portfolios being able to cover some specialized ground without having to buy 30 individual stocks. This provides democratization for increasingly more effective but still broadly diversified portfolios for people just starting out when portfolios are generally their smallest. An ETF portfolio comprised of four funds, where a couple of the funds can be had commission-free (allowing for DCA) and where a couple of things can be avoided, makes for a good start to an investing career and is starting to come together as innovative ETFs proliferate.