EFA Still Muddling

Yesterday I took a look at the Model ETF Portfolios on CNBC that Matt Hougan and Tom Lydon contributed to and noticed something interesting. Although I did not look at all of the portfolios the ones I did all seemed to be trouncing the iShares MSCI EAFE Index Fund (EFA). First, good for them for outperforming that benchmark but I also think it contributes, as a microcosm if nothing else, to the idea that for foreign exposure the EAFE Index still stinks.

This is been an important topic here in terms of blog content and portfolio strategy. Per Google Finance, EFA is down 0.36% YTD compared to a 2.70% gain for the the S&P 500. If you look at the largest countries in the index you can see why. Japan (EWJ) is the largest component at 22% and for the year is up 0.87%, the UK (EWU) is second at 21% and is up 1.96%, France is third and is down 7.61% this year followed by a solid 5.21% lift for Australia (EWA) which is a client and personal holding.

It is very difficult for an investor to add value with an EAFE Index Fund assuming they are trying to capture foreign markets. In addition to most of the larger component countries not being attractive investment destinations the attributes of any country you might want to own can get blended away increasing the correlation to the SPX or a country in good shape might be too small to matter; the approximate 16% YTD lift in Finland hassn't done much for the broad index because it only makes up 1.6% of the EAFE.

Finland has very little debt, many pink sheet ADRs but is part of the euro currency. I've mentioned it before as being an interesting destination. The Scandinavian countries have done pretty well fundamentally through the crisis and so we have a fair bit of exposure there. There is the GlobalX Nordic ETF (GXF) which is heaviest in Sweden at the country level and banks at the sector level.

I've been harping on this same point for years for the simple reason that the fundamentals from these places (US, big Western Europe and Japan) are not very good. The analysis needed to decide what to avoid is not that complex; do you know you don't want to buy Greece? Anyone who can make that decision can also make the same decision about other countries too.

From there if you look for countries where the debt to GDP is maybe below 50%, the budget deficit is only a couple of percent (or even a surplus) and the government hasn't lied recently about other economic stats (like Hungary a couple of years ago); this sort of narrowing of the field should make the task easier in looking for countries to invest in.

I do think that in many instances it makes sense to use individual stocks as proxies for favored countries but to the extent not everyone is comfortable with individual foreign stocks there are obviously plenty of ETFs that can help do the job. In addition to all sorts of individual country funds there are sector funds, regional funds and themed funds that can get the job done--this too is obvious.

The reason to repeat this sort of thing so often is that I think the least compelling countries are going in the wrong direction while the healthy ones continue to do well. IMO it is crucial for people to understand this and change how they do things if they haven't done so already.

Yesterday may have been Jason Varitek's last game for the Red Sox. He has been part of a nucleus of players that has worked hard and achieved great things. In June 2008 my brother Larry and I went to a game at Fenway. A friend of a friend was on the team that year and we got to go into the clubhouse and dugout after the game (yeah we were thrilled beyond words) and one memory that made a huge impression was Varitek sitting in front of his locker wrapped almost like a mummy with ice everywhere answering questions from reporters. This was a picture of sacrifice on several levels.

On another baseball note I've made it about 45 minutes into part two of The Tenth Inning (sequel of sorts to Ken Burns' Baseball documentary) to see the segment about 9/11 and the 2001 World Series. Right after the Diamondbacks won there were several talking heads who immediately proclaimed it the best World Series ever and I remember thinking we need a little time to let it settle some and after reliving it in the documentary it really was an amazing series.