Sector Investing

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Go International!
By Jay Kaeppel, Optionetics.com
5/18/2004 6:45:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10406

Every once in awhile the average investor comes across an advertisement or a column telling them of the importance/necessity/advantages/etc. of investing in foreign stocks. The arguments usually involve diversification and/or opening oneself up to investment opportunities around the world that you won’t get by just holding IBM and GE.

At first blush it all makes a lot of sense. The only problem is that most investors have enough trouble trying to figure out what to do with the U.S. stock market, let alone worrying about the stock markets throughout the entire world. So the majority of investors never do avail themselves to the capital gain and/or diversification opportunities available in international stocks. And that’s too bad. On the surface it is understandable that someone might be overwhelmed at the prospect trying to figure out quite literally where in the world to invest. But if we take a closer look, maybe it’s not as hard as it seems. In a nutshell, the answer seems to be to buy the one’s that are going up. But we’ll get to that in a moment.

The Choices

The idea of building a portfolio of individual stocks of companies from all over the world is simply not a realistic option for most of us. The work involved in scanning the globe for investment opportunities is simply too overwhelming a task. As an alternative, there are mutual funds that invest in foreign stocks. They generally fall into one of two categories – global funds and country funds. Global funds can and will invest anywhere in the world. Wherever the funds portfolio manager finds investment opportunities, that’s where the fund will invest. The good news is that if the fund manager is good you will get the diversification and exposure to opportunities outside the U.S that you are looking for. The bad news is that you never really know what you are getting. The fund may be heavily invested in Asian stocks one quarter, European stocks the next and Japanese stocks the quarter after that. This may be good or it may be bad, but the problem is if it is bad, you won’t know until after the fact.

Country funds on the other hand (generally) focus their investments in a single country. The good news here is that if you happen to be in the right country at the right time you can do very well. On the flip side, if you buy and hold a country fund and that country experiences a bear market, you can suffer surprising large losses.

So what’s an investor to do? There are over twenty exchange trade funds [ETFs] available representing indices from different countries throughout the world. With a single purchase an investor can own a portfolio of Japanese companies or Swedish companies or Canadian companies, etc., etc.

So what would happen if an investor took the overly simplistic approach of simply buying the five country ETF’s that have advanced the most over the previous 12 months? Answer: something good. I ran a test using the list of country ETFs, which appears below in Figure 1. The methodology was painfully simple, as follows:

· After the last trading day of each month, identify the five ETFs that have advanced the most over the last 240 trading days. Buy and hold those five ETFs (each ETF represents 20% of the portfolio) until the end of the next month. Then repeat this process.

· If less than five funds posted an advance over the past 240 trading days, then hold that portion of the portfolio in cash (in other words, if only three funds were up over the past 12 months, buy those three funds and hold the remaining 40% of the portfolio in cash).

Ticker
Country

(EWA)
Australia

(EWC)
Canada

(EWD)
Sweden

(EWG)
Germany

(EWH)
Hong Kong

(EWI)
Italy

(EWJ)
Japan

(EWK)
Belgium

(EWL)
Switzerland

(EWM)
Malaysia

(EWN)
Netherlands

(EWO)
Austria

(EWP)
Spain

(EWQ)
France

(EWS)
Singapore

(EWT)
Taiwan

(EWU)
United Kingdom

(EWW)
Mexico

(EWY)
South Korea

(EWZ)
Brazil