iShares ETFs

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iShares ETFs: 2 Funds in Developed Markets & Emerging Markets For Any Portfolio

by Alexander Green, Chairman, Investment U; Investment Director, The Oxford Club
Wednesday, May 9, 2007: Issue #673

Our Oxford Club Grand Tour continues its swing through Italy. So far we’ve visited Venice, Florence, Tuscany and Rome, seeing the historic sights and sampling the local cuisine.

Italy, of course, is a land where the food is delectable, but the service is hit or miss. (Essentially your wine glass is never empty and your coffee cup is never full.)

As you may know, the Grand Tour is a tradition dating back to the 17th century. Back then, no gentleman’s education was considered complete without a tour of the great cities of Europe. (I say “gentleman’s education” because women were rarely included – or even given an education, for that matter.)

We arrived in Rome two days ago and so far we’ve visited the Coliseum, the Roman Forum and several other of The Eternal City’s historic sites, including the Vatican. It’s difficult to imagine a greater collection of artwork anywhere in the world. (And, bear in mind, we were just at the Louvre last week.)

Of course, our group of investors is keeping a close eye on European financial news, too… especially two iShares ETFs that we’ll examine closely below…

Global Economic Markets Picking Up the Slack

It was particularly interesting to see Sarkozy win the French election. Will he really slash France’s bloated state bureaucracy and free business from red tape and rigid labor laws?

Who can say? But you might as well wish him well. After all, an uptick in international growth will only help keep the U.S. economy humming.

Bear in mind, the U.S. economy only grew at a measly 1.3% annual clip in the first quarter. That is hardly the stuff of dreams for equity investors, although the market is taking things in good stride.

Why? Because as the U.S. growth rate has slowed in recent quarters, foreign economies have been picking up the slack:

India is booming.
The Chinese economy is still red-hot.
And even the central banks of Europe and Japan are raising rates to keep their once-suffering economies from overheating.

The Push Toward International Stocks

It was this expected strong performance from international economies that caused us five years ago to adjust our Oxford Club Asset Allocation model to one half international stocks for our equity portfolios.

Some investors were skeptical at the time, believing it was too ambitious to put half their stock allocation overseas. However, the move has paid off handsomely.

The international index (Morgan Stanley EAFE Index) has tripled the performance of the S&P 500 over the past five years. And the emerging markets index has done even better, rising seven times as much.

With international economies decoupling from the more sluggish U.S. economy – and the dollar grinding steadily lower – it’s still a good time to plunk a good portion of your equity funds into foreign stock markets.

Here’s a quick investment fix for anyone with little or no international exposure

Investing in iShares ETFs… and Their Major Upsides

Simply plunk a few dollars into two exchange-traded funds (ETFs):

iShares MSCI EAFE Index (NYSE: EFA) for developed markets, and
iShares MSCI Emerging Markets Index (NYSE: EEM) for emerging markets.

The iShares ETFs have five significant advantages

1. They give instant diversification in a single investment.

2. You can use stop orders, limit orders, and trade them intra-day, which you cannot do with mutual funds.

3. The iShares funds give you plenty of foreign currency exposure. (That means they will be worth more in dollar terms as the greenback declines.)

4. Both iShares ETFs have very low annual expense ratios, especially compared to actively-managed funds in the sector.

5. And, finally, both of these exchanged traded funds are highly tax-efficient.

Sure, you might do better by investing in individual foreign stocks and ADRs (American Depository Receipts). But for conservative investors with too little money diversified outside their own borders, these iShares funds are a good first step.

Good Investing,

Alex

Today’s Investment U Crib Sheet

Of the 53 national markets MSCI Barra tracks, 38 of are outperforming the S&P 500 this year. As of today, 27 of those stock markets are up by double digits. Who’s leading the pack?

MSCI Barra divides its national indexes into two categories, Emerging Markets and Developed Markets. (The two iShares funds Alex mentioned above will give you exposure to both groups.)

In Developed Markets, the Singapore index is up 17.6% year-to-date, with Finland and Australia right behind it.
The Emerging Market leader is Peru, up 52% with four other countries posting 20%+ returns, so far.

Of course, individual companies delivering new products and expanding their business in these markets stand to do even better. Here are the companies Alex is recommending now.