Blending Country Funds

Recently I disclosed selling out of Australia (which I expect to be temporary) over concerns about the housing market coming to fruition. We obviously can't know with certainty if there will be any meaningful fallout to the Aussie banks if things get ugly but the visibility is there so it just made sense to simply avoid the space for now so that neither clients nor I need to worry about.

Also disclosed in that post was that I had been using the WisdomTree Pacific Ex Japan ETF (DNH) for a lot of small accounts as a proxy for foreign where one or two ETFs is appropriate for the entire foreign exposure. I mentioned that I replaced DNH with a combo of iShares Canada (EWC) and Global X Nordic 30 (GXF). Part of the story here is that the broad foreign funds, like EFA, are heaviest in countries that are probably no better off than the US. It would not make sense for anyone agreeing with this line of thinking to buy EFA, instead it would make sense to create foreign exposure some other way.

In trying to approach this by blending together countries with different fundamental attributes and funds that have different sector make-ups under the hood. If the countries are too similar or if the funds are too similar then there is less diversification bang for the buck. Obviously in picking two countries in this manner you have to be favorably disposed to the countries.

Not to get too pancake and a smoke but here are a couple of examples of what this could look like. Norway and Singapore: Norway is obviously an energy based economy and Singapore obviously is tiny and more of a financial hub and with some manufacturing. The countries are clearly different enough and over short periods of time there is some zigzag effect between the two countries' stock markets but the sector make up of the Global X Norway Fund (NORW) and iShares Singapore (EWS) may not diverge enough.

On the plus side for this combo NORW has 41% in energy and 8% in materials. EWS has no energy or materials but has 25% in industrials and is much heavier in consumer and telecom. These differences are good, in the context of this conversation, but they are each heavy in financials with NORW having 23% and EWS having 44% (down from 49% BTW).

Chile and Switzerland appear to be quite different from each other. iShares Chile's (ECH) top sectors are utilities 22%, industrials 19%, materials 19%, staples 14% and financials 11% (ECH client and personal holding). iShares Switzerland is 26% healthcare, 22% financials, 22% staples and 10% industrials.

One last example is New Zealand and Thailand. The largest sectors for iShares New Zealand (ENZL) has 24% in materials, 15% in telecom, 14% in discretionary, 12% in industrials and 11% in utilities. iShares Thailand (THD) has 32% in financials, 31% in energy, 8% in staples and 8% in materials.

The focus here should not be the specific examples (I am not suggesting 50% of a foreign portfolio into Thailand) but the notion of blending things together to achieve a desired result. The blended sector examples are pretty good in terms of not being lopsided. Obviously the funds in this post have been large cap for their respective countries and of course providers like IndexIQ, Market Vectors and EG Shares offer small and mid-cap exposure to many countries too.

One point I've made before about ETFs is that they offer the chance to create some pretty well constructed and efficient portfolios. There does not seem to be too many people writing about ETFs this way although I am quite certain there are people using ETFs this way. If this appeals to you then spend some time on it, if not then don't. Obviously this could be done with more than just two funds but the real focus here should be blending; getting a little more out of the product wrapper. Maybe in a few years the combo will be Mongolia and Slovakia?

On a personal note this has been a crazy week. On Tuesday on the drive back from the studio in Phoenix a fire call came in, it turned out to be and abandoned campfire that wasn't even smoldering but the nature of our fire seasons are such that we must always respond in force to anything. Then yesterday while I was at the gym we had a medical call come in at the campgrounds near by and right after that we met with a recruit looking to volunteer with our department. Busy is good but it'd be ok if it slowed down for the rest of the week too.