The Wisdom of Foreign Sector ETFs

By Carl Delfeld

Investing in overseas sectors has been a hit and miss proposition until Wisdom Tree recently rolled out its ten foreign sector ETFs. How do these compare with other options such as global sector and country specific ETFs?

ETFs are a convenient, flexible, transparent, low-cost and tax-efficient way for investors to gain some international exposure but the choices can be overwhelming. They include country-specific, ADR, global, global sector, regional, foreign currency, and the new international sector ETFs.

It is critical that investors look “under the hood” and see where their money is really going. For example, if you invest in the popular MSCI Europe Asia, Australia and Far East ETF (EFA), about half of your money is going to just two countries: Japan and the UK while exposure to great countries like Ireland and Singapore is insignificant.

The MSCI Emerging Market ETF (EEM) has a much more balanced weighting with 17% going to South Korea, 11% to Taiwan, 10% to both China and Russia, 9% to South Africa, 7% to Mexico and 5% to India. This is the most even distribution of the regional ETFs and has the added bonus of low fees.

The country-specific ETFs by the iShare family are an interesting play on foreign markets but keep in mind that since they are market cap weighted, just a few companies in the basket can dominate the other companies in the ETF. Just three companies account for 49% of the Austria (EWO) ETF and Samsung and Ericsson account for 22% of the South Korea (EWY) and Sweden (EWD) ETFs, respectively.

Country ETFs are also a creative way to target specific international sectors. Canada (EWC) has 32% exposure to the energy sector followed by Brazil (EWZ) with 24%. Belgium (EWK) offers a surprising 61% exposure to the financial sector followed by Hong Kong (EWH) with 52%. Taiwan (EWT) has 57% of its weighting in technology and Switzerland (EWL) has 32% in healthcare.

Now we come to the global sector ETFs and the new kid on the block, the Wisdom Tree international sector ETFs. Let’s look at the financial sector to compare and contrast them.

The iShares Global Financial Sector (IXG) has an exposure of 41% to American financial firms with Japan and the UK representing an additional 20%. Its top five holdings are Citigroup (3.8%), Bank of America (3.8%), HSBC (3.2%), AIG (2.6%) and JP Morgan Chase (2.5%). If you want a pure play of international sectors, the Wisdom Tree option is the way to go but blending in American firms with the global sector ETFs can lower volatility make many investors more comfortable with venturing into international markets.

The Wisdom Tree ETFs are not weighted by market value but rather on the company’s record of increasing dividends. This plus the omission of any American companies gives investors a very different pattern of exposure.

The Wisdom Tree International Financial ETF (DRF) top companies are HSBC (7.3%), Lloyds (3.3%), Royal Bank of Scotland (3.2%) and Barclays (3.0%) and ING (2.7%). It might surprise you that Barclays is now the largest money manager in the world and HSBC has recently passed Citigroup to become the largest bank in the world in terms of assets. Wisdom Tree offers other international sector ETF covering the basic materials, communications, consumer cyclical, energy, health care, industrials technology and utilities sectors.

By now you might be thinking that this is getting a bit complicated. I have an easy solution. Look at the S&P Global 100 (IOO) ETF which invests in the 100 largest companies in the world. About half are U.S. companies and the rest spread around the world. Unfortunately, it is market cap weighted but it is still the easiest way to put some punch in your portfolio. Everyone is talking about the resurgence of the Dow but the S&P Global 100 ETF has beaten it by 40% so far this year. A little international can go a long way.

Carl T. Delfeld President & Publisher Chartwell Partners www.chartwelladvisor.com

Carl has over twenty years of experience in the global investment business with a strong background in Asia.

• Author of global investor primer “The New Global Investor”

• President of the global investment advisory firm Chartwell Partners

• Publisher of the Chartwell Advisor ETF Report and Asia-Pacific Growth

• Columnist on global investing with Forbes Asia: “Global Gambits”

• Former U.S. Representative to the Executive Board of Asian Development Bank

• Chairman of the global economic strategy think tank ChartwellAmerica

• Asian specialist with the U.S. Joint Economic Committee and the U.S. Treasury

• Former member of the U.S. Asia Pacific Economic Cooperation Committee

• Former investment executive with Robert Baird & Company and UBS

• Graduate of the Fletcher School of Law & Diplomacy with economics scholarship from U.S.-Japan Friendship Commission

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