International ETFs That Help Diversify Portfolios

 |  Includes: AFK, ILF, VNM
by: Tom Lydon

Exchange traded funds focusing on overseas markets can give a portfolio diversification benefits that would protect investors even if the U.S. economic recovery slowed. There are a few countries that have strong growth potential in the near future, despite what the rest of the world is doing.

"For most investors, we recommend a 20% to 25% allocation in foreign equities, given their diversification benefits within a portfolio. Investing in foreign equities provides a hedge against a weakening U.S. dollar and allows for exposure to faster-growing economies. Passively managed ETFs that aim to cover a broad regional or country index are an easy way to invest in macroeconomic themes," Patricia Oey for Morningstar wrote.

The following ETFs track countries with strong growth potential, reported Sean Williams for The Motley Fool, which could outperform if the U.S. economy remains sluggish:

  • Market Vectors Vietnam (VNM) The country has shown extreme growth even while the drama of the U.S. and Europe were plaguing markets. In fact, Vietnam's GDP was reported at around 6%, and has not gone below 3.1%, reported Williams. Since most of the economy is centralized, global growth patterns don't directly affect Vietnam's economy.
  • Market Vectors Africa ETF (AFK) This ETF focuses in on Nigeria and South Africa, both of which are abundant in natural resources. Other holdings include Egypt, Morocco and the U.K. Financials, materials and energy are the top sectors represented. Although Egypt's GDP growth has been flat recently, Nigeria, Morocco, and South Africa's recently reported GDP growth rates of 7.4%, 4.8% and 3.2% are enticing, reported Williams.
  • iShares S&P Latin America 40 Index ETF (ILF) Brazil and Mexico are the top-rated countries. The 2.9% yield is healthy and the focus on consumer staples countries gives the fund a diversification boost. Various South American countries are included in the index, including Columbia, where less restrictive trading policies are helping.

Tisha Guerrero contributed to this article.

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