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 personally.
2 comments:
Do you see EWA to be a reasonable buy at its current level?
Roger - alpha I think plays an important role in delivering returns. It's obvious that EWA has put up some good alpha due to higher commodity prices in Austrailia over the past year or so.
I think you're right in that if investors reach too broadly for diversification, they could get burned with not so stellar returns (witness what happened with EFA - its alpha is awful).
What I'm learning is that alpha should matter more now to investors in a reach-for-yield market.
Here's a question for you, though - what is your opinion of EWS (iShares Singapore)? It's got a lower alpha but its beta is similar to EWA and the shares are cheaper - happy trading!
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