Watch out for overlapping holdings in ETFs (EEM, EFA, EWJ)

Includes: EEM, EFA, EWJ
by: Roger Nusbaum

There is a great post by J.D Steinhilber about foreign holdings. I would add a couple of things, writes Roger Nusbaum.

First though, the article points out a couple of things that I have addresed before. There has been an increased correlation between the US market and a lot of foreign markets. There are still plenty of foreign markets that do offer a better chance of diversification.

I have written about this stuff a zillion times. Think about this from a common sense starting point. Countries that rely on completely different types of products tend to be at different points in various cycles. I think anyone can get a hold on this concept.

The article does not address the commodity angle that I am so fond of. The author mentions owning EFA, EEM ans EWJ totalling 33% of their portfolio but not how much is in each ETF. Depending on the weightings of the three they might be making a huge bet on Japan. Japan makes up 21% of EFA and EWJ is Japan. With the mix they have I don't think they are making the most of the diversification that they could with other ETFs. That may be ok, they might think there will be huge things from Japan and they may be right (not my belief but who knows). My point is that any time you blend ETFs together you should look for overlap of stocks and countries.