Finding Fortune In Foreign ETFs

Interestingly enough, from the start of the year 2000 through the end of 2005, the strongest performing ETFs were concentrated in several regions of the world. However, none of these ETFs were associated with the U.S. In fact, the top four ETFs had ties to emerging countries located in Eastern Europe. The Templeton Russia and Eastern European Fund (TRF), an actively managed closed-end fund , led the way with a gain of more than 200%. The only country-specific ETF in the top five was the iShares MSCI Austria Index ETF (EWO). Because Austria is considered to be more stable than most of Eastern Europe, EWO is seen as a "gateway" into the emerging region and a lower-risk option for investing in a somewhat volatile area.

Looking ahead at the rest of the decade, there are a number of regions throughout the world that have the potential to outperform the U.S. stock market. The Far East has had its moments in the last five years and, overall, it has outpaced the U.S. Investors with a higher risk tolerance may want to look into country-specific ETFs based in countries like Singapore, South Korea and Taiwan. Investors with a lower risk tolerance may want to opt for regional ETFs such as the Asia Tigers Fund (GRR), which gives investors exposure to several southeast Asian countries including South Korea, Hong Kong and Taiwan. These types of funds reduce country-specific risk without decreasing returns, resulting in a more attractive risk/reward ratio.

Risks

There are a few negative aspects investors must consider before buying foreign ETFs. The regulations outside the U.S., specifically in emerging countries, can be much more lenient than those imposed on U.S. businesses and could result in unethical business practices, which can threaten investors' returns. Geopolitical risk also tends to be more prevalent in foreign countries due to the current tensions throughout the world and there is currency risk associated with companies based overseas that could affect their performance. Finally, volatility can be higher in foreign countries than it is in the U.S. and, therefore, foreign investment may not be appropriate for all investors.

Conclusion

For investors, putting some money into foreign investments can present significant advantages. Instead of taking the time and effort to pick individual stocks, a simple way to diversify a portfolio without taking too many positions is by investing in foreign ETFs. The negative correlation between specific countries and the U.S. stock market will help lower a portfolio's overall downside. Therefore, if the goal of your portfolio is to increase potential rewards without greatly increasing risk, you must consider foreign ETFs. Keep in mind, however, that the appropriate mix of ETFs from a number of regions is essential in maximizing the risk/reward ratio.