The U.S. crisis up until now has included a debt bubble, a residential housing collapse, a systemic financial breakdown and an economic recession. The U.S. will still have to contend with higher-than-normal credit defaults for less worthy issuers, commercial property foreclosures and risks to the U.S. dollar.
All of these crisis-level concerns pose dangers to any type of investment. In fact, we did see the world markets, and emerging markets, in particular, fall deeper and further into a black hole in 2008. The world (ex-U.S.) wasn't quite ready to quote unquote decouple from U.S. business or U.S. consumer activity.
Yet, what about going forward?
It does seem that even a modicum of stability in the world's largest economies (i.e., U.S., Europe, Japan) spell dangerously desirable opportunities in emerging market ETFs.
Why dangerously desirable? Having spent years in Southeast Asia, I learned a thing or three about Mandarin Chinese. For instance, wei ji is the word for crisis. And while some native speakers deny it, wei ji actually derives from the word for danger (wei xian) and the word for opportunity (ji huay).
Debate may rage on about the equation... Crisis = Danger + Opportunity. Yet there's little argument that pullbacks in emerging markets provide risk-taking opportunities.
Those opportunities are most evident in the growing middle classes of China and Brazil. For example, China's commodity binge spending is evidence for housing demand. You can profit from Claymore China Real Estate (TAO).
Similarly, consider the changes taking place in Latin America's largest economy, Brazil. You can tap Brazilian consumers' increasing purchasing power with a fund that is 40% weighted towards food products, household durables and specialty retail. Get a gander at the Market Vectors Brazil Small Cap Fund (BRF).
Investing in the purchasing power of foreign consumers is not a sure thing. It's a risky, or... dangerous proposition. Still, the rewards are there, particularly if the Brazilian real and the Chinese yuan appreciate against the U.S. dollar.
However, don't get too giddy about dollar devaluation or the reflation of industrial cycles in emerging regions. For instance, gaining access to a rapidly expanding Latin American economy with a superb bond rating may be enticing. Yet the new iShares MSCI All Peru Capped Index Fund (EPU) has a 65% weighting in basic materials.
Think about it. Is there any reason to believe that the new Peru Fund (EPU) will perform any differently than WisdomTree International Materials (DBN) or SPDR S&P International Materials (IRV)?
Few people have been as openly bullish about basic industry investing during the reflation of the global industrial cycle. (See my feature at May feature at ETF expert entitled, Let's Build Stuff!) Yet that doesn't mean that one's entire portfolio should be comprised of investments that are so strongly correlated to a single theme.
As if to show a dramatic difference in the potential performance of Peru (EPU), the iShares folks provided 3-year, back-dated performance of the All Peru Capped Index at 23.5% annualized. The comparisons were made with other titans of emerging market investing such as the 3-year annualized results of the MSCI Brazil Index at just 1.9 and the MSCI Emerging Market at -8.2%.
Clearly, these are dramatic performance discrepancies. In fact, it would seem that the collective strength of the 25 stocks in the Peru Index... albeit, very materialistic... have pulled off something rather unique. Spectacular 3-year returns!
Credit the power of a 20% weighting in gold metal miner, Compania de Minas Buenaventura (BVN). The 100%+ 3-year return is contributing heavily to the 3-year 23.5% annualized AllPeru Capped Index.
Still, a more thorough investigation uncovers the risks of a 1/5 weighting in a single stock. In a matter of months, the All Peru Capped Index shed 75% in value. Lose 75% of your money and you'll require a 300% return to recover the losses!
Bottom line? Over time, the iShares MSCI All Peru Capped Index Fund (EPU) is likely to correlate very highly with other resource-rich countries like South Africa (EZA); EPU is also likely to correlate highly with International Materials (DBN) and Global Materials (MXI). Don't make the mistake of believing that you are well-diversified if you've got all of these investments in your portfolio.
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: 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.
Gary Gordon firstname.lastname@example.org