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An Example of a Well-Diversified Portfolio: A Basket of ETFs on Israel, Turkey and Russia

|Includes: iShares MSCI Israel Capped ETF (EIS), RSX, TUR

International Country ETFs offer worldwide opportunities to the investors looking to expand their horizons beyond US and Europe. One of the primary objectives for internationally investing is to improve the efficient frontier by adding uncorrelated investments. While it makes sense to diversify the portfolios by expanding into new geographies, the underlying sector dimension should also be considered in the asset allocation process. In addition to taking account  the characteristics of a certain market, investors should also be aware of sector composition of this market. For example, the Russian stock market is highly overweight on oil stocks,whereas the Turkish stock market is highly overweight on financials and Israeli stock market is overweight on healthcare. Therefore, considering sector biases is crucial: A portfolio manager who is already overweight on oil companies wouldn't be achieving further diversification when he/she adds  an ETF on Russia to her portfolio.

For investors focusing on Emerging Europe, one practical advice could be to invest in combinations of countries that have varying sector biases. The table below shows the largest and second largest sectors in several emerging European countries

 Market Largest Sector in the Index 2nd Largest Sector in the Index
Russia Oil & Gas (51.87%) Financials (20.49%)
Israel Healthcare (51.00%) Financials (16.87%)
Turkey Financials (54.45%) Telecom ( 10.07%)
Poland  Financials (44.42%) Oil & Gas (17.05%)
Czech Republic Financials (44.86%) Utilities (24.75%)


For example, a combination of Russia, Israel and Turkey could provide a diversified exposure to emerging markets from a sector point of view. Contrarily, investing in  financials-biased Turkey and Poland at the same time would simply mean over-exposure to the financial sector. ( As a side comment, I also would like to highlight the healthcare bias of the Israeli index. In my experience, this is a rare and welcome characteristic for an emerging market)

To conclude, international diversification is best achieved through sector and regional diversification








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