Investing Beyond Large International ETFs

by: Kevin Quon

There is no doubt that nations outside of the United States are becoming more important from an investor's perspective. With the creation of sector specific ETF's, the ability to narrow down investment opportunities is becoming ever more prevalent. Yet even as financial choices become available that pinpoint an investor's focus in a particular region, investors continue to be somewhat constrained from controlling their foreign investments in a manner that might hold more lucrative returns.

The more popular international ETFs, as measured by trade volume, tend to follow a similar theme that still capture a very loose and broad definition of international growth. Vanguard's Emerging Markets ETF (NYSEARCA:VWO), for instance, holds about 850 companies that generalize the world outside of the United States. The same goes for the iShares MSCI Emerging Index Fund (NYSEARCA:EEM), both of which attempt to track the MSCI Emerging Markets Index.

While perhaps these two funds may be ideal for investors looking for a hands-off approach to international exposure, anyone looking to maximize profits will find little aid in such an encompassing fund. An equivalent situation could be found were an investor to take a position in the SPDR S&P 500 ETF (NYSEARCA:SPY) in order to maximize profit by investing in the U.S. As such a fund takes on a lack of a particular focus for growth, investors are constrained to investing in both the good and the bad at any particular time. They take the on the oil companies as well as the financial sector. While easily investing in the economic development of the country as a whole, the investment in SPY would severely lack the ability for an investor to control their position toward more defined areas of growth.

In the same sense, more active global investors looking to specialize in particular segments of worldwide development may do well to narrow their investments into more specific regions. As the BRIC nations (Brazil, Russia, India, China) comprise most of the expected growth entailed in an international fund, investors may consider increasing a position in the iShares MSCI BRIC Index Fund (NYSEARCA:BKF).

Investors able to scrutinize trends that favor one nation's progress over the other may even consider breaking down these investments further:

  • Investors in the growth of Brazil may consider the iShares MSCI Brazil Index Fund (NYSEARCA:EWZ). As a key exporter of natural resources to China, Brazil's material abundance has led to its rapid development. However, the fund's top holdings reflect a balanced position in basic materials producer Vale (NYSE:VALE), domestic banking leader Unibanco (NYSE:ITUB) and state-owned oil giant Petrobras (NYSE:PBR).
  • Investors watching the growth of Russia may consider the Market Vectors TR Russia ETF (NYSEARCA:RSX). With its large reserves of natural gas, oil and coal reserves, Russia remains a heavy energy exporter. The fund's holdings reflect such an emphasis with large holdings in natural gas titans Gazprom (OTCPK:OGZPY) and Novatek along with oil leaders Rosneft (OTC:RNFTF) and Lukoil (OTCPK:LUKOY).
  • Investors in the growth of India may consider the WisdomTree India Earnings Fund (NYSEARCA:EPI). As a democracy with a highly-educated but fractured society, India's development has come at a more balanced angle. The fund's holdings carries the largest weight in information technologies leader Infosys (NASDAQ:INFY) along with basic materials/consumer good conglomerate Reliance Industries. As a financial hub of the region, several banks such as the ICICI Bank (NYSE:IBN), State Bank of India, and HDFC Bank (NYSE:HDB) top the list as well.
  • Investors in the growth of China may consider the iShares FTSE China 25 Index ETF (NYSEARCA:FXI). With its rapid growth, China's development has heavily supported its financial and energy sectors. As China grows internally, this fund's top holdings include China Construction Bank Corp. (OTCPK:CICHY), Industrial and Commercial Bank of China, and the Bank of China (OTCPK:BACHY). China's large need for oil resources explains why CNOOC (NYSE:CEO), PetroChina (NYSE:PTR) and China Petroleum and Chemical (NYSE:SNP) all have large positions in this fund's portfolio.

The ability to retain control over various sectors on the basis of evolving economic environments is what allows for the exploitation of market inefficiencies. For example, there is value in the ability to disinvest in India if it went to war over Pakistan. By investing in a broad global investment, this is not possible. There would be little ability to adapt to changing surroundings.

In the same sense, the very criticism of a broad global investment can also be true of a more regional investment. The world's market do not necessarily trade in along the borders of geopolitical boundaries. For those looking to further narrow or supplement international exposure, investing in funds that focus on global trends can offer a means to diversify layers of control over one's international investments. Several such ETFs that provide such a capacity may be found in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.