Your Investments: New ETFs target global investing

There is a massive creation of wealth that is taking place, and it’s not happening in Western Europe or in North America.

By AARON KATSMAN
November 21, 2012 23:32
3 minute read.
shekel and dollar exchange

shekel versus dollar 370. (photo credit: REUTERS)

 
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In last week’s column I discussed the need for investors to understand differences in low-cost Exchange Traded Funds (ETFs). In short, how two ETFs that are mimicking a similar asset class can be totally different, thus rendering it of vital importance that investors look under the “hood” and understand what they are investing in.

This week I would like to discuss some relatively new ETFs that can help investors invest globally.

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As my clients can testify, and as I have written here numerous times, I am a huge fan of investing globally, ie. not only investing in the US. Why? Because the world is changing.

There is a massive creation of wealth that is taking place, and it’s not happening in Western Europe or in North America.

If current trends hold, the size of the middle class in Europe will shrink by 20 percent over the next 20 years, and more or less hold steady in the US.

Now jet across to Asia, or down to Latin America, and the middle class is estimated to grow by 30-40% over the same time period. In the last few years alone, 40 million Brazilians have joined the ranks of the middle class.

Prudent investors will follow the money.



These economies, while now driven in many cases by export, will start becoming more self-sufficient and local consumers will power economic growth.

Recent history Investors have had the opportunity to invest globally through ETFs. There were a host of products available that could link investors to specific countries or geographies. The problem was that one to two companies may have been so dominant in the index being tracked that investors were being short-changed and not really gaining exposure to individual market.

A case in point was the MSCI Israel index.

I wrote a few years ago about the makeup of that index.

Generic drug giant Teva Pharmaceuticals made up over 25% of the index. As such, investors weren’t really investing in Israel, as they wanted – rather they were investing in a single stock because its stock had such a substantial weighting.

Another issue with country-specific ETFs is that they may be dominated by one specific industry Take Brazil for example.

While investors may want to gain exposure to the 40m. people that are now middle class, the more established offering of ETFs pretty much only gave investors exposure to energy stocks.

Fresh ETFs Some upstart ETF providers like WisdomTree and GlobalX have launched products that provide a solution for those who want to invest globally.

GlobalX has launched an ETF that tracks consumer stocks in Brazil. They are clearly trying to tap into the explosive consumer market and have broken with the traditional Brazil products that always featured huge weightings for energy.

Add to the mix a World Cup and Olympic games – all in the next four years – and consumer stocks have potential to move higher. They have also launched an ETF on ASEAN markets (made up of the likes of Singapore, Indonesia, Malaysia and others) who are estimated to have 300m. in the middle class in two years.

The market-cap of ASEA is bigger than that of Brazil, India and Russia. Wisdomtree and their flagship emerging market equity income fund has a strategy implemented that limits the weighting of any sector to 10%, as well as limiting specific country weighting.

This allows investors to truly have exposure to more emerging market economies and spreads out the exposure to a multitude of sectors. And these are not the only three. The market has seen many new launches of these kinds of targeted ETFs over the last year.

Double-edged sword While this is seemingly good news for investors, it also has a drawback. It makes investing even more complicated for do-ityourself investors. They now have even more product and strategies to sift through.

For many individuals, it’s gotten too difficult.

A few days ago I met with a lady who had managed her own money for over a decade, since her husband had passed away.

She told me that there are so many potential investments that she feels overwhelmed and felt that it’s time to turn it over to a professional.

Investors should speak with their financial adviser and discuss whether it makes sense to take advantage of some of these new products – and if so, how? And they should ask if they should continue to do it by themselves, or use a professional.

aaron@lighthousecapital.co.il Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.

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