Do Economic Freedom Rankings Predict ETF Investing Success?

Includes: EWA, EWH, EWM, EWS, EWW, EZA
by: Gary Gordon

Recently, Carl Delfield of Investment U suggested that investors would reap the financial rewards of owning an equally-weighted portfolio of ”economically-free” countries. The author offered the most popular corresponding country ETFs as a way to tap the potential of those sovereigns.

Philosophically, I might agree with Delfield’s contention that such a portfolio would prove profitable. In fact, very few individuals are as big of fans of economic independence as I am. In the early 90s, I chose to live in Hong Kong for several years because of its free market capitalism and flat tax rate. What’s more, I travelled back and forth to Singapore, enamored by its pro-business policies and support of free trade.

That said, one should question whether high ratings of economic independence constitute reason enough to invest in a corresponding country’s ETF. Moreover, one should be wary of buying-n-holding any basket of assets, especially when there are beneficial ways to control your investment outcomes.

For 2012, Hong Kong, Singapore and Australia earned the top spots (#1, #2, #3) in the The Wall Street Journal/Heritage Foundation’s Index of Economic Freedom. Below is a quick chart view on how an investor might have done owning-n-holding Hong Kong (NYSEARCA:EWH), Singapore (NYSEARCA:EWS) and/or Australia (NYSEARCA:EWA).

An optimist might note that the five-year bear-to-bull environ resulted in recovery of principal. On the other hand, #53 Malaysia (NYSEARCA:EWM), #54 Mexico (NYSEARCA:EWW) and #70 South Africa (NYSEARCA:EZA) dramatically outperformed the “freedom portfolio.” And they did so with arguably less downside risk.

The “take-homes” here are simple. First, there is no single indicator (e.g., “Economic Freedom,” unemployment levels, tax policies, GDP, interest rates, oil prices, inflation, etc.) that can definitively provide you with the best investment portfolio. You need to include a variety of data points - fundamental, technical, contrarian, economic, historic - when selecting ETFs for ownership.

Second, and perhaps most importantly, you need one or more mechanisms to control the outcome of your investment decision. For example, you might select Hong Kong (EWH) because of economic independence, impressive employment statistics, a “soft landing” in China and favorable technical uptrends. (See chart below.) And yet one disastrous turn in Europe could potentially send EWH into a tailspin. Therefore, guarantee that your purchase of EWH leads to a big gain, small gain or small loss. Use appropriate stop-limit losses and/or hedges.

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Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.