More investors are getting global exposure through Exchange Traded Funds (ETFs). News that China is for the moment the world’s second largest economy is a reminder — probably unneeded – that the growth these days is global. (The darkest green in the map below represents real GDP growth over 10%. The US, taupe, is in the negative 2 to 4% bucket.)
According to a recent item by Larry D. Spears at Money Morning there are more than 290 international, regional and foreign-country-focused funds trading in the U.S. today. ETFs are traded as stocks, but include a variety of holdings like a mutual fund.
ETF trading can be volatile, so research is important. Research first on the ETF itself to see what’s in there, then on the politics and economics of the countries it invests in. In his article, Spears notes that the iShares MSCI Emerging Markets Index Fund (EEM) invests in 23 different countries, but half of its assets are in just four: South Korea, Brazil, Taiwan and China. Even single country ETFs have concentrations. The iShares FTSE/Xinhua China 25 Index fund (FXI) has half of its value in just five large companies.
One of the interesting things about ETFs is that institutions and individual investors invest along side one another. A big name in investing that has for some time shown an interest in global ETFs is the Harvard Endowment. The financial brains in Cambridge have shown an interest in both broad multi-country funds and specific country-focused ETFs. The Ivy League Endowment recently had over $1 billion of its portfolio split among is largest global ETF positions. All have certain bents in terms of industries and companies they are most heavily invested in.
Among Harvard’s largest holdings in February were the following. Included is the dollar value of that stake at the time and some highlights of the ETF as of July 30:
- EEM — $317.7 million
iShares MCSI Emerging Markets Index (18% China, 16% Brazil, 13% South Korea. Samsung is the largest single holding. 25% of the funds holdings are financial stocks.) - FXI — $306.1 million
iShares FTSE Xinhua China 25 Index (48% Finanical Stocks. 10.4% of fund in China Mobile stock) - EWZ — $199.0 million
iShares MSCI Brazil Index (26% Materials Stocks. Biggest holding is oil giant PetroBras. No. 2 is iron ore juggernaut Companhia Vale do Rio Doce.) - EWY — $95.3 million
iShares MSCI South Korea Index (17% Samsung Electronics Co. stock, 29% of the fund is in the information technology sector.) - EZA — $90.4 million
iShares MSCI South Africa (27% financial stocks, 27% materials stocks)
Over the past 20 years the Harvard Management Company reports the Endowment has returned an annualized 11.7% compared to 8% for its endowment peers. Its current portfolio breakdown is:
- 46% Equity (including 11% Foreign Equity and 11% Emerging Markets Equity)
- 16% Absolute Return (They don’t elaborate on what that is, but this category is generally hedge funds which aim to perform in any kind of market conditions. They don’t always deliver. Last year Harvard’s were down 18%)
- 23% Commodities and Real Estate
- 13% Fixed income
- 2% Cash
Bill Bernstein offers a less complicated model portfolio in his recent book, the Investor’s Manifesto: 42% Total US Stock Market, 18% Total Foreign Market, 40% Bond Market. It’s a simple model, Bernstein writes, but “Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it.”
