Country ETFs
Emerging-markets investing has been a key theme for a number
of years now, and ETFs offer the ability to gain exposure in one of two ways. We don't think it's necessarily the right time to be adding exposure to this area, but if you must, an ETF can give you attractively broad exposure on the cheap. First, if you do not want to worry about individual country allocations, you can buy a broader ETF that does it for you. The iShares MSCI Emerging Markets fund uses a sampling approach to track the MSCI Emerging Markets Index for a 0.75% TER. Alternatively, db x-trackers MSCI Emerging Markets tracks the same index, but takes a replication approach, holding all the companies in the benchmark. Thus far, it has more closely tracked the index than the iShares offering, and is cheaper with a TER of 0.65%. That makes it the more attractive of the two as far as we're concerned. If you prefer to narrow the field slightly, the iShares FTSE BRIC 50 offers exposure to Brazil, India, Russia and China for a TER of 0.74%;
We generally dislike single-country emerging-markets offerings as we believe many investors misuse them to chase performance in hot areas. However, for those who have a legitimate gap in their portfolio to fill, you can buy an ETF to plug it, and it's likely to be much cheaper than an actively managed offering. iShares, db x-trackers and Lyxor all offer a range of single-country ETFs ranging from Brazil, Russia, China and India to Taiwan, Turkey and Korea. Nevertheless, investing in this way can expose you to high levels of volatility should you overdo it. The risk of such a strategy has clearly been on show in the last couple weeks. For example, iShares MSCI Brazil is down almost 20% year to date. For most investors, we think a broader ETF makes a better choice.
Commodity ETFs
Commodity investing brings with it the same plethora of ETF options--but also the same risks--as single-country investing. As we wrote in out recent article, Commodity ETFs Can Offer Long Term Diversification, it would be easy to get caught up in the hype that currently surrounds many of the world’s major commodities. However commodities are subject a wide array of risks that make many of these ETFS unsuitable for most investors. Performance of ETFs tracking single agricultural commodities such as soybeans or wheat are at the mercy of a variety of factors such as weather, supply shocks and political events which are almost impossible to predict. As a result, commodities are one of the most volatile asset classes available. For example, ETFS Nickel lost 27% last year, but is up nearly 12% so far this year making it one of the most volatile funds in the marketplace. Therefore, as we have previously stated, we are not fans of single commodity funds as they are often too volatile to use well.
That said, we believe that there is a case to be made for including a more diversified commodity vehicle as part of a long-term portfolio allocation strategy. Such an approach can actually reduce the overall risk of your portfolio (since commodities don’t move in lockstep with equities or bonds) and provide much needed diversification in difficult market environments. As such, ETFS All Commodities DJ-AIGCI is worth a look. The fund tracks the Dow Jones-AIG Commodities Index, and currently has 33% in energy, 30% in agriculture, 19% in industrial materials and 9% in both precious metals and livestock, adding diversification to a portfolio and removing the temptation for investors to try and time the market themselves.
