Through 11/4/2011, the S&P 500 is down about -0.3% in 2011. In fact, the SPDR S&P 500 Trust (NYSEARCA:SPY) is actually up about 1% because the fund reinvests its dividends.
Yet most portfolios are not limited to U.S. stocks alone… they contain exposure to developing economies. And most emerging market funds are heavily weighted towards the underperforming materials sector. In fact, Vanguard MSCI Emerging Markets (NYSEARCA:VWO) still registers a lackluster -13% year-to-date.
With 20/20 “foresight,” one might have thought to invest solely in domestic equities. (It wouldn’t have been a great idea over the last 10 years, but it would have enhanced returns over the prior 10 months.) Even better, a 2011 investor who shunned the financial sector via WisdomTree Dividend Ex Financials Fund (NYSEARCA:DTN) would have garnered 7.0%.
Unfortunately, accurate crystal balls are difficult to come by. That said, it is possible to shift away from a myopic “what-should-I-own” focus towards a recognition of what shouldn’t be owned.
Consider the reality that China and other emerging markets had been tightening monetary and fiscal policy since the summer of 2010. An astute observer may have decided that — in a period of central bank tightening in the developing world — resource-rich EMs might not perform as well as EMs with minimal exposure to the materials sector.
Not surprisingly, in the first 10 months of 2011, South Africa (NYSEARCA:EZA) and Brazil (NYSEARCA:EWZ) were pulverized. In contrast, Emerging Market Country ETFs with limited materials exposure -- Malaysia (NYSEARCA:EWM), Indonesia (NYSEARCA:EIDO), etc. -- significantly outperformed their peers.
Again, reducing risk in one’s global portfolio may ultimately boil down to what you don't own. For instance, if economic growth in emerging markets is being constrained by central bank policy, one might shift to the “non-cyclical” segments in those regions. It follows that monetary and fiscal tightening is less likely to have an adverse impact on utilities and infrastructure.
The iShares Emerging Market Infrastructure Fund (NASDAQ:EMIF) fared better than broader emerging market indexes in the first 10 months of 2011, even though EMIF is still down on the year. The same can be said for EG Shares Brazil Infrastructure (NYSEARCA:BRXX) relative to Brazil (EWZ) and EGShares China Infrastructure (NYSEARCA:CHXX) relative to China (NYSEARCA:GXC).
Listen to the latest ETF Expert podcast for clues on what to own as well as what not to own. What’s more, discover ways to tap potentially profitable infrastructure investments in Brazil. After all, the world’s 7th largest economy hosts World Cup soccer in 2014 and the Olympics in 2016.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.