Recent developments in the ETF market have me thinking of a lot more asset classes than I have in the past. Here are some of the market segments and funds that I think are very, very interesting, and that I'm continuing to monitor and evaluate:
- 1) Small Cap International: While I steer clear of tilting in the U.S. markets, the idea of international small-cap exposure makes sense. I believe that correlations between large-cap stocks are tightening worldwide, and will continue to tighten; conversely, I think that small-cap international will retain some diversification benefit, as those companies are tied more closely to the fate of local economies. There are a number of ETFs to choose from in this space, including the WisdomTree International Small Cap Dividend Fund (DLS) and the SPDR S&P International Small Cap ETF (GWX).
- 2) China: I'm convinced by the long-term China boom, and as I've said before, I think global indexes are underweight China thanks to the hegemony of free-float adjustments. As Randall commented recently, it's a matter of when and not if China becomes a major economic superpower. For China exposure, the SPDR S&P China ETF (GXC) seems to offer the most diversification, although arguments can be made for the focused large-cap exposure of FXI as well.
(I'm less convinced about the broader BRICs—Russia seems unstable and a bit one-dimensional, India's infrastructure is poor and Brazil I just don't know much about.)
- 3) Japan: I'm pretty sure I have enough Japan exposure in my portfolio, but given its proximity to China and the way valuations have come in, I've recently heard some convincing arguments from very smart people for increasing your exposure to Japan. This is not something I'm likely to do, but I find it interesting enough to mention here.
- 4) Bond Diversification: The introduction of the new bond ETFs is interesting to me: international Treasuries, TIPS, high yield. I'm not sure how this all fits into my portfolio, as I haven't studied enough. But I plan to look into it in 2008.
- 5) Thematic Asset Classes: I can't help but be intrigued by some of these thematic ETFs. The Claymore Timber ETF (CUT) deserves study as an asset class previously unavailable to retail investors like me. I'm also intrigued by the arguments for the water ETFs (FIW, PHO, PIQ, etc.). I see too much hype in alternative energy, but energy efficiency and the PowerShares Cleantech Portfolio (PZD) make sense to me. And I've always liked that carry-trade ETF, the PowerShares DB G10 Currency Harvest Fund (DBV). Nuclear power (NCR)? Agribusiness (MOO)? There are a lot of good ideas out there.
- 6) Coming Down The Pike: That doesn't even touch on what might launch in 2008. A 130/30 fund or a market-neutral portfolio or even a hedge fund replication product could be interesting. The All-World NETS ETF from Northern Trust is a winner. And as the data accumulates on the various fundamental/dividend/etc. ETFs, it'll be time to look at those again.
There we have it. I tend to re-evaluate my portfolios in a significant way in late January/early February, once the craziness of the holiday season settles down. We'll see what happens. Generally speaking, though, I like to keep it simple, and the core of my portfolio will remain the same: broadly diversified, low-cost exposure to the global equity markets.
In the meantime, I'll keep monitoring my low-cost portfolio for what it is: a measure of the lowest-cost way the average investor can gain exposure to a broadly diversified portfolio of assets. To me, it's a testament to the entire ETF industry that you can achieve solid exposure for 13.65 basis points per year in annual expense. And I hope that number continues to come down in the future.
~ By Matthew Hougan