Why Foreign ETF Investing for Diversification?
June 7th 2007 at 1:07pm by Tom Lydon
Foreign stocks can add diversity to an investor’s portfolio, especially via exchange traded funds (ETFs). These days domestic and overseas equities are in sync, more than they have ever been. The question remains, what does this mean for diversification within a portfolio? Paul J. Lim for The New York Times reports that in order to gain diversification through overseas investing, investors must be willing to go into different areas of the globe, not just the hot regions. Another consideration is that not all foreign markets are in line with Wall Street. While many European markets are highly correlated to the S&P, some are not and can be used to diversify a portfolio. Markets such as Japan, India, Hong Kong and South Korea are relatively uncorrelated.
Lim writes that having a portion of your portfolio invested in Japan will help with diversification. But, as Roger Nusbaum of Random Roger points out, there are other individual countries out there that can do the same thing. He gives the example of an investor wanting 30% in foreign equity; they could allocate 3% each to Australia, Ireland, Canada, Norway and Switzerland and reduce correlation to the S&P 500.
In this day it is important and easy to invest in global areas, especially with ETFs. The following are a few reasons to look outside of the U.S. for your portfolio:
- declining dollar – there are currency ETFs investor’s can use.
- non-correlation- look at the countries that are not closely correlated to domestic markets.
- 50% market cap outside U.S. – there are opportunities outside of the U.S.
- GDP for different countries – economics and growth come into play when making the investment decision.
- exit strategy to reduce risk – when investing, not only is it important to do your homework to know when to buy, but it is important to establish an exit strategy to protect your portfolio
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.