It may be time to redefine what is risky. For example, it wasn't that long ago when a conservative investor may have sought dividend yield from safe financial stocks in the U.S. Today, most investors won't touch the Financials Select SPDR (XLF) with Captain Ahab's fishing pole.
Just how risky have U.S. financial stocks been? The daily price range for XLF is close to double the daily price range of the iShares MSCI Emerging Markets (EEM).
Remember, the Financials Select SPDR (XLF) represents banks, diversified financials and insurance companies... boring old insurance companies. It must be one of the safest economic segments in the most reliable economy in the world, right? Things do change.
Consider additional changes that have been coming down the pike. California, the world's 7th largest economy on its own, faces a $21 billion budget deficit shortfall and its bonds are junk. Meanwhile, ratings agency Standard & Poor's lowered its outlook on Britain to negative on Thursday. While Standard & Poor's reaffirmed Britain's 'AAA' long-term credit status, the mere fact that the country's long-term credit is in doubt means old, reliable England is more risky.
Investors may need to recognize, then, that the developed markets may actually be a riskier prospect than places like China or Brazil. For instance, China's $600 billion economic stimulus bolsters its middle class spending, infrastructure improvements as well as Chinese purchases from Chile, Brazil and neighboring countries in Southeast Asia. China may go through bulls and bears, but China may just be a safer investment than the U.S. (I'm biting my tongue!)
Developed markets may indeed be working their way towards stability. Yet the case for high-flying expansion isn't on anyone's radar. Rather, a more stable developed world simply means that developed countries may continue to buy goods from... yep, the emerging market regions.
A Twitter user (or is it twitterer) asked me what I thought about 2 new emerging market funds, the Emerging Markets Energy Fund (EEO) and the Emerging Markets Metals & Mining Fund (EMT). I told him that I liked the emerging sector fund concept, but that I expect the price movement to be identical to similar funds in existence.
For example, the iShares Brazil Fund (EWZ) offers large company exposure to resource-rich Brazil. If you have EWZ in your portfolio, however, you're not going to want to duplicate your efforts with the iShares Global Materials Fund (MXI). The correlation is astonishingly high. Similarly, if the Emerging Markets Metals & Mining Fund (EMT) demonstrates a near perfect correlation to the iShares Brazil Fund (EWZ), then the bulk of the investing public will not see a need for the new emerging market sector fund.
There are plenty of precedents. For instance, while 160,000 shares of iShares Global Energy (IXC) trade daily, State Street's SPDR International Energy (IPW) has less than 3000 shares trading on any given day. That's woefully low trading volume after 9 months in the public domain, particularly from a State Street sponsored ETF. What's more, IXC and IPW travel the same price path.
Is this because the international energy concept fails to distinguish itself from that of global energy? If so, how would emerging market energy set itself apart from global or international?
Again, from a conceptual standpoint, emerging market sector ETFs are appealing. That said, I expect the Emerging Markets Energy Fund (EEO) to trade with about as much vibrancy as State Street's SPDR International Energy (IPW). And that's not particularly vibrant.
There’s another emerging market that grabbed he headlines this past week: India. And there are several exchange-traded vehicles for investors in India.
There's the Barclays iPath India ETN that tracks an index of roughly 60 companies including IT mainstay, Infosys. This exchange-traded note has moved 50% higher in 2009 alone. There's the first-to-trade WisdomTree Earnings Fund (EPI), which is up 47% and favors longer-standing, higher dividend producers. What's more, there's the PowerShares India Portfolio (PIN) with nearly 1/3 in energy companies as well as a 43% showing through 5/20/09.
What the YTD performance numbers don't tell you, however, is MORE important than what they do tell you. For one thing, nearly half of the YTD gains were picked up on Monday, 5/18, due to the favorable outcome in India's national election. Second, India investments dropped a monumental 65% from Feb 2008 to March 2009.
It follows that the oldest India ETF, the WisdomTree Earnings Fund (EPI), is still down 34% from its February 2008 inception price. India hasn't even kept pace with the S&P 500 SPDR (SPY) in the same time period.
Granted, investors should take note of investments that have nearly doubled off of their March lows. Yet the unabated, uncontested ride up should lead to some skepticism about the price movement's sustainability.
If I were to consider India's prospects versus those for the West, I'd pick India. Yet I favor China’s potential over the possibilities for investment gains in India.
Technically speaking, China has the edge on a sustainable bull market run. China 25 (FXI) offered higher lows in March 09, whereas WisdomTree Earnings Fund (EPI) set lower lows alongside the U.S. Many believe this may be due to India's greater dependency on foreign countries, whereas China and Brazil have more substantial middle classes.
Fundamentally speaking, neither large cap India ETFs nor large cap China ETFs may be screaming bargains today. Each has surged approx 30%-40% from the last available P/E data of 3/31; China ETFs (FXI, PGJ) and India ETFs (PIN, EPI) had approximate P/Es of 12 at that point. Yet if one assumes relatively flat earnings over the last 6-7 weeks, P/Es would be closer to 16 right now. (Note: Small Cap China HAO still looks cheap, though!)
Economically, China has an edge on everything from housing starts to manufacturing activity to GDP growth to trade surpluses. And while India's information tech segment is the envy of most of the world, less than 1% of the workforce is employed there.
Culturally, it's hard to deny that Chinese emphasize education and entrepreneurship more than... well, more than Americans, Europeans, Middle Easterners and Indians. Again, when all is said and done, China is more likely than India to rocket out of the global doldrums.
Does that mean that I think India is a poor investment choice? No. I'm merely comparing apples to apples, suggesting that China is a better selection for one's emerging market portion of a portfolio. In the same vein, if you’re looking for diversification clear across all emerging countries, the Vanguard Emerging Market Fund (VWO) fits most portfolios.
If you'd like to learn more about ETF investing... then tune into In the Money With Gary Gordon. You can listen to the show live or via podcast or on your iPod.
Disclosure Statement: ETF Expert is a web log (blog) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.