Assembling a Diversified, Yet Lean Foreign ETF Portfolio (ETFs: ILF, EWZ, EWW, EWY, EZA, EWC, ITF, EEM, VPL)

by: Roger Nusbaum

Roger Nusbaum submits: A reader emailed in asking about an article on MarketWatch written by Bill Donoghue about a portfolio of foreign ETFs that he either manages or sells through his own website (so it appeared to me). The results have been good -- he cited that it's up 20% in the last six months.

The article listed the holdings as follows: iShares S&P Latin America 40 (ILF), iShares MSCI Brazil (EWZ), iShares MSCI Mexico (EWW), iShares MSCI South Korea (EWY), iShares MSCI Canada (EWC), iShares MSCI South Africa (EZA), iShares S&P/Topix 150 (ITF), iShares MSCI Japan (EWJ), Shares MSCI Emerging Markets (EEM), and Vanguard Pacific (VPL). Those ETFs made up 80% of the portfolio and the other 20% was in an unnamed fixed income fund, perhaps more than one (the article did not specify).

This is one of several portfolios offered by Mr. Donoghue. The article did not offer an opinion as to how much of an investor's assets should be invested in foreign, be it this specific portfolio or something else. The reader wanted to know my thoughts on the portfolio.

First thing, as I always say in these types of posts, all portfolios like this will have flaws including anything I might assemble along these lines.

This chart isolates the first two quirks that I noticed. The portfolio owns both EWJ and ITF. You almost can't see EWJ on the chart because the returns have been as close to identical as I think is possible. I'm not sure what the value is in buying both. I think you're just paying an extra commission.

The other two ETFs in the chart both cover Latin America. The performance has not been quite as identical as the two Japan ETFs. You can decide for yourself if there is enough of a difference between the two to own both. If you were curious, ILF has just over 50% in Brazil.

I did not want to make the chart too difficult to read but if you add VPL to the chart, you see it also very closely correlates to the two Japan ETFs, although it did start to diverge a little bit starting last October. I think there is enough of a difference in iShares Mexico to keep that one, for anyone bullish on that country.

The portfolio as presented has ten ETFs. I think it could easily be cut down to seven ETFs and not materially change the how the portfolio performs.

To the reader's question, I did not take the article to imply 80% of anyone's holdings should be in foreign. I took it more to be whatever your foreign weight will be this is what he would suggest. He gives a little insight into how much should be in foreign early in the article when derides only 10-20% for being cliche'.

For what it's worth I have about 35% of most client equity portfolios in foreign equities.

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