Geoff Considine

Select Foreign Index ETFs As Defensive Assets: Anything Doing?

Eli:

Thanks for the clarification. Actually, the more interesting point here is that Roger is saying that he is NOT suggesting that these country-index funds (any of them) provide good protection from a broad domestic downturn. This is, indeed, exactly what my analysis shows. This is a centrally important point. Roger is saying that well-chosen equities from these countries are the way the he is using foreing investments to hedge against a broad domestic decline---not the index funds. Many people will read Roger's original article and infer that he is talking about using index ETF's or other index funds from the countries that he discusses, but he has pointed out that this is not what he means. Obviously, my analysis agrees. Many investors think that simply investing in other countries will confer effective protection from a U.S. market decline. My analysis agrees and apparently Roger also agrees. This runs counter to what many investors think and counter to what many investment writers write--this is a very important idea.

Select Foreign Index ETFs As Defensive Assets: Anything Doing?

Hi roger--my intent is not be pedantic here. Many people equate an investment in a COUNTRY with investment in a broad equity index fund for that country.

Select Foreign Index ETFs As Defensive Assets: Anything Doing?

Roger:

So you are not saying that funds that track Australia, Sweden and Ireland are in fact good bets for withstanding a U.S. market downturn?

If so, this point was not entirely clear--at least to me.

Geoff

Select Foreign Index ETFs As Defensive Assets: Anything Doing?

Also to Roger:

If you are specifically telling me and other readers that you don't see these funds that you listed in your article as a good hedge against a broad domestic market decline, what was your point in listing them? I am not trying to be a pain here, but what was your point with regard to these funds?

Select Foreign Index ETFs As Defensive Assets: Anything Doing?

Hi Roger:

I knew this post would draw you out :)

As to your points:

1) With or without EWN, the results are the same in terms of this effect. Foreign index ETF's / funds are often high Beta / low R^2 / high volatility and thus are of limited value as a true hedge.

2) You do often state that individual stocks are the way that you manage these risks and I agree totally. Individual stocks can provide far more attractive qualities. When you buy a stock, you are buying a specific company. When you buy an index fund, you are buying into the general asset class or index.

My main point here was simply that many people DO think that by buying EWA they will gain more diversification than they do.

The point of this article is to show how the stats are a good complement to fundamental analysis.