Forest For The Trees

Here is a link to a very good article about the big foreign ETFs, EFA and EEM. What makes the article post worthy was commentary from an investment manager named Herb Morgan from Efficient Market Advisors in San Diego. Mr. Morgan said he see no “compelling evidence for the inclusion of emerging markets in a portfolio, partly due to the risk.” Well the risk involved may not be appropriate for his clients but the chart to the left is reasonably compelling. The article also cited this from Mr. Morgan (but not as a direct quote); he uses the broader iShares MSCI EAFE fund, which invests in developed international companies. In addition, Morgan noted that the annual expense ratio for the emerging markets ETF, at 0.75%, is more than twice the EAFE fund, which charges 0.35%. I took that as one reason why he prefers EFA over EEM. In the last two years EEM is up 80% and EFA is up a little over 40%. For the last twelve months EEM is up about 35% and EFA is up 10%. For the last three months EEM is up 6% or 7% and EFA is down 1% or so (I just eyeballed these numbers by looking at the Yahoo charts page). I’m thinking the extra 40 basis points should not be an obstacle to buying the fund. More importantly it is not clear to me that anyone should compare developed to developing for purposes of fund selection. Emerging is always more expensive and the two asset classes don’t seem to have a tight correlation. A lot of people get quoted for...

CNBC Asia Tonight

I am scheduled to appear in my usual slot during the first half hour on Asian Market Watch. I received an email from my point of contact asking me for my latest newsletter as a prep for the interview. Since I don’t have a strict content format I will just write a quick post with some bullet points and email the post to the network. The Fed is probably the most important thing right now. They have a history of going too far and the decisions they make over the next couple of meetings will make or break whether they do go too far. Earnings season is about to start and as I said on the show before the last earnings season I think earnings will come in just fine but they will not be the key driver short term for index levels. I think a secondary effect in the US markets this week (and probably next week too) will be rejiggering of portfolios for quarter end and so any trades done for that purpose may be unwound after the holiday. If I was not clear, the Fed will announce 25 basis points on Thursday. As I say every appearance that I make around Fed day that while I don’t know how they will word the announcement the board will figure a way to have as little impact on capital markets as possible. I give much less weight to a great consumer confidence number than to the various production and capacity data points, GDP, LEI, the slope of the yield curve and jobs numbers. I would add though that...

Reader Questions

I had a couple of reader emails come in that I’d like to answer. Here is the first one; Do you see EWA to be a reasonable buy at its current level? Well I suppose that depends on the time frame the reader is interested in. I wrote before, about this, that sometimes I get a feel for a good entry point and I don’t have a feeling either way right now in terms of a trade. Sorry, but that is an honest answer. I would have no qualms whatsoever in buying EWA today for a client (for whom an individual Aussie stock was not appropriate) right now as an investment. Long time readers know I am a big believer in in some expousre to commodity based stock markets. The goal here is a type of diversification that doesn’t come as easily by owning the EMU countries. One of my favorite technical analysts is Bill McLaren. He comments almost every week about Australia on CNBC Asia. You can click here to read his latest comments about the ASX 200. And again for disclosure I own EWA. Here is the other question; what is your opinion of EWS (iShares Singapore)? I should have said that both of these questions were left on my post about Tim Middleton’s ETF portfolio where I reference EWA. There is some correlation between the two, which surprised me but Singapore is more of a technology manufacturing economy and Oz is more of a natural resource play. And if you click here to look at the chart you will see that Oz has wildly outperformed due...

Luck? Skill? Who Cares?

The quarter is about to end and maybe we are seeing stocks get marked up into the 30th. If so that might mean we sell off next week, we’ll see. I was in the office today and toward the end of the day I looked at how a few accounts had done so far, with two days to go in the quarter. It looks like I will have had a great quarter. The SPX is up 21 points since the close on March 31. I calculate that to be about 1.7%. I looked at about 10 accounts and was pleasantly surprised. I should probably note that I do not fixate on account balances. I have partners that can do that if they want, I tend to focus on other things. Of the accounts I looked at, the worst one was up 1.8% for the quarter and the best one was up 4.1%. I would say the mean was around 3.2% or 3.3%. No two accounts are exactly the same due to tolerance for volatility and other circumstances. While I am pleased with the results, the thing that stands out to me is that because of the ongoing caution toward the market, most accounts have 10%-15% in cash. One thing that just about every investment manager talks about is beating the market with less risk than the overall market. I will add while the market may get crushed in the next two days, for all I know, it seems unlikely that I would lose a lot of the spread gained thus far. The point is not to pat myself on...

Problematic ETF Portfolio

Tim Middleton from MSN posted his ETF Portfolio update for the quarter. He said that his position in EFA held back the performance so he is going to reduce his foreign exposure. Aside from whether or not he is looking in the rear view mirror to manage the portfolio I think the biggest problem he had was being too broad. This chart overlays EFA (all developed foreign) vs iShares Australia (EWA) that I have probably written too much about. Also working for my clients was Ireland and Norway (but those were individual stocks). I think EFA was held back by Japan and a weak Euro, but I may be wrong abut that. Also in the second quarter EFA paid no dividends but a blend of different products to comprise the foreign component could easily pay 50-75 basis points in a quarter. The point here is to recognize that being too broad can work against you. I had a question the other day about just owning SPY and EFA and I said it would probably allow you to capture most of what is going on. Well that may be so, but a little extra lifting and the results could have been much better in the foreign component. Disclosure: I own EWA...