Foreign ETF Portfolio

A reader emailed in asking about an article on MarketWatch written by Bill Donoghue about a portfolio of foreign ETFs that he either manages or sells through his own website (this is how it appeared to me). The results have been good, he cited up 20% in the last six months.

The article listed the holdings as follows; iShares S&P Latin America 40 (ILF), iShares MSCI Brazil (EWZ), iShares MSCI Mexico (EWW), iShares MSCI South Korea (EWY), iShares MSCI Canada, iShares MSCI South Africa (EZA), iShares S&P/Topix 150 (ITF), iShares MSCI Japan, Shares MSCI Emerging Markets (EEM), and Vanguard Pacific (VPL). Those ETFs made up 80% of the portfolio and the other 20% was in an unnamed fixed income fund, perhaps more than one, the article did not specify.

This is one of several portfolios offered by Mr. Donoghue. The article did not offer an opinion as to how muchof an investor’s assets should be invested in foreign, be it this specific portfolio or something else. The reader wanted to know my thoughts on the portfolio.

First thing, as I always say in these types of posts, all portfolios like this will have flaws including anything I might assemble along these lines.

This chart isolates the first two quirks that I noticed. The portfolio owns both EWJ and ITF. You almost can’t see EWJ on the chart because the returns have been as close to identical as I think is possible. I’m not sure what the value is in buying both. I think you’re just paying an extra commission.

The other two ETFs in the chart both cover Latin America. The performance has not been quite as identical as the two Japan ETFs. You can decide for yourself if there is enough of a difference between the two to own both. If you were curious, ILF has just over 50% in Brazil.

I did not want to make the chart too difficult to read but if you add VPL to the chart you see it also very closely correlates to the two Japan ETFs, although it did start to diverge a little bit starting last October. I think there is enough of a difference in iShares Mexico to keep that one, for anyone bullish on that country.

The portfolio as presented has ten ETFs. I think it could easily be cut down to seven ETFs and not materially change the how the portfolio performs.

To the reader’s question I did not take the article to imply 80% of anyone’s holdings should be in foreign. I took it more to be whatever your foreign weight will be this is what he would suggest. He gives a little insight into how much should be in foreign early in the article when derides only 10-20% for being cliche’.

For what its worth I have about 35% of most client equity portfolios in foreign equities.

4 Comments

  1. An all international portfolio, by its name, is not a diversified portfolio. However, the pairing of 2 nearly identical eff’s can result in less volatility for the same return. This could add alpha performance to the manager

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  2. that is quite insightful, thank you.

    Reply
  3. Perhaps I have missed something, but it would be a strange international portfolio that completely bypasses Europe. One may take a dim view of Eurozone and UK economic growth prospects (although the former has begun ti surprise on the upside) but stocks quoted on those markets have performed well. In many cases, fine multi-national companies quoted in Europe are trading on substantially lower valuations than US peers. A zero weighting to broad European equities appears a rather aggressive view – and that’s before we even start thinking about the special situations that may have appeal in any of the individual countries covered by ETFs. Very strange.

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