Here is a link to an article by James Picerno about ETF proliferation and a look to the future about what direction the industry might take.
The visibility for future ETFs in one way seems clear in that there will be product that covers market segments that now can't be easily accessed. In another way it is not so clear because "not easily accessed" would not seem to imply a couple of thousand more ETFs to come as Robert Arnott theorizes in the article.
I do not think of myself as someone who uses particularly obscure ETFs but perhaps that self assessment is wrong. As a matter of philosophy I think simple is better and so an entire portfolio of strategies not easily understood would seem to be counter productive.
Using individual stocks to capture a desired effect can be simpler than using ETFs. Obviously picking a stock from Singapore takes on some more risk than a country fund for Singapore but the big phone company for a country is not the most difficult type of stock to analyze compared to say a bank.
A reader left a comment that noted his very reasonable discomfort with picking stocks from emerging markets (in this case China). So here you can go with a product obviously but it might be worthwhile to learn a little more about how to pick a stock from one of these places.
I plan to address this in more detail in this week's video but for now I would ask how much would you invest in one emerging market? Would you go as much as 5%? What about more? If you have been reading this site for a while you might recall that starting out with 3% is about as heavy I go and with an emerging market stock it would be more like 2%.
Is the risk profile of most big cap stocks from a country so much greater than a product that capture the entire market of that same country? The vast majority of the time it isn't.
More about this over the weekend.
Wikinvest Wire
3 comments:
Hi Roger
I tend to think about concentration relative to some reasonable benchmark. The entire emerging market space I believe constitutes about 5% of world equity capitalization. So a total allocation of 5% to emerging would match the world benchmark. Of course, any particular country/company will be much less than that, even a big one like China.
It seems the front end decision to think long and hard about is how much do you want to depart from the benchmark. 5% in one emerging market seems like a lot - unless you've got some good reason to be that overweight. I suppose the alternative way to look at it is that you aren't exactly going to blow up your entire portfolio no matter how bad that 5% does. Another interesting point is that matching the benchmark means the non-US equity should be about half total equity, which is much more than a lot of people are comfortable with (although I personally think that's an irrational fear).
For me, I've got about 4% in Vanguard's emerging market index fund. Pretty plain vanilla, but it gets me the asset class exposure at low cost. Frankly, I think of it as more a way to capture the rebalance yield since it has fairly high beta.
Aloha, Roger.
My emerging market strategies come pretty close to yours, generally no more than 2% in a given market. That's a loose rule of thumb, however. I put less into a "real" developing market and perhaps more in those that are making the jump to developed status, such as a Singapore.
I caution that I have a very high risk tolerance for non-US investments. I spent 31 years in foreign affairs, so I invest in what I know (sounds like Peter Lynch, doesn't it?). I am far more comfortable in foreign markets, even emerging markets, than I am in domestic sectors I know little about. I am more likely to invest in Taiwan or Malaysia than I am in biotech, for instance.
I use three US timber companies, PCL, PCH and RYN (fundamental weighting across the three) to get liquid exposure to timber land as a (nearly) pure-play asset class. I leave out WY, IP and MYS because their business results are driven by more downstream activities, and DEL and POPEZ were too small to meaningfully move the portfolio based on their appropriate fundamental weights. Timberland is very difficult to own directly without a lot of capital, and returns from direct holdings cannot be well diversified unless major-endowment-sized allocations are made. Timberland is also very illiquid if held directly. My simple approach gives geographic diversification and high liquidity with pure-play exposure to this attractive asset class, which has: 1) a low correlation to US equities (PCL had just a .39 correlation, .15 R squared, to SPY weekly returns since 1999), 2) a good track record - 13% nominal returns since 1999, and 3) good inflation-hedging qualities. The rest of my portfolio is made up of ETFs, but this is one asset class I couldn't get exposure to without holding individual stocks.
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