An ETF Rebalance For the New Year

I was recently asked by a journalist at Investors Business Daily to identify some of the ETF successes from 2007. My first thought was to list several of the hot emerging market ETFs, like Brazil (EWZ) and Singapore (EWS).

Then, I thought about the question some more. Did I really want to fuel the emerging market craze with 30% annual profit promises?

Granted, the world has been beating the U.S. upside the head. The S&P 500 is clinging to gains in 2007, while the rest of the world has its 10% and then some.

However, the real opportunities that came about in 2007 are those that help investors diversify their portfolios and protect against harsh downside risk. Indeed, even those who wish to continue funneling money into momentum markets need to have a plan for reducing the "beta" in their overall picture.

That's why I listed the following concepts as the best concepts from 2007:

1. Foreign Fixed Income. Until this year, it was very difficult to diversify across asset classes and across different regions. In the year, however, we've seen the introduction of the PowerShares Emerging Mkts Sovereign Debt Fund (PCY) and the SPDR Lehman Intl Treasury Bond ETF (BWX).

Both give investors foreign bond exposure... one of the few asset classes that has no correlation with the U.S. stock market. Both offer yields as good as domestic treasuries, and in the case of PCY, you are getting yields closer to 8% for the risks associated with emerging market investing.

Still, are these risky investments? In truth, they may be safer havens in times when investors flee international stocks and emerging market stocks. What's more, if the U.S. dollar continues to struggles, these investments gain in value.

2. Commodity Investing. Until this year, you were essentially relegated to gold (GLD) and oil (USO). Not that this was an entirely bad thing... as both made enormous strides.

Yet in the world's hunger for "stuff," there are many other commodities out there, including livestock, agriculture, industrial metals, natural gas, timber and so forth.

Now you have exchange-traded notes that can help you diversify across the entire spectrum, including the Dow Jones Total Commodity Index (DJP). You even have an opportunity to invest in timber through the Claymore/Clear Global Timber Index (CUT). And just like foreign fixed income, commodities move independently from U.S. stock assets.

3. Global. The third big opportunity provides diversification without a whole scale bet on international ETFs; that is, global index investing comprises the best companies in a given area without necessarily excluding the U.S. The results are often exceptional, and they often come with less volatility than a pure international play.

For instance, two of my favorite examples in this realm are Consumer Staples and Telecom. The iShares U.S. Telecom Fund (IYZ)? Not particularly impressive. Yet the iShares Global Telecom Fund (IXP) has knocked 2007 out of the ballpark.

It's a very similar story for consumer staples. One might feel safest in the "old school" U.S. camp of SPDR Select Consumer Staples (XLP). However, the results pale in comparison to the iShares S&P Global Consumer Staples (KXI) Fund.

Comments

[User 120461:]

Gary thanks for the article. However, in my modest opinion #1 - the foreign fixed income ETFs will not shine in performance terms, but in net inflows terms. Meaning investors will buy it, but compared to say Russian Equity ETF, they will not be rewarded with attractive performance. Anyways, great job and for those interested in international fixed income - here is the bible... www.seekingalpha.com/a...

2007 Dec 20 10:09 AM

[Greg Pinelli:]

Foreign bond funds may do well..it depends very much on the interest rate structure we see in 2008..and that will be a ball bouncing off the walls of inflation..deflation..... the relative value of other currencies against the US$..In any case...I'd automatically discount anyone, such as our previous commentor, who thinks Russian equities are attractive.
Russian companies are anything but transparent..they are first and last tools of state control..which means, for investors, they giveth and taketh when they please and to whom. Invest in ANYTHING Russian at your own risk.

2007 Dec 22 11:29 AM