Global ETFs: "Charting" the Course

11/19/2004 12:00 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Chartwell Advisors is new to our coverage at the Money Show Digest. The firm focuses exclusively on using exchange-traded funds to build a globally diversified portfolio. Here, Carl Delfeld offers some of their latest comments on several intriguing ETF opportunities.

"The growth of global opportunities coupled with the decline of the US dollar make building a portfolio that is globally diversified essential to reducing the overall risk of investing. One method of global investing is to concentrate on US large multinational companies that do business throughout the world. The advantage is that these large companies have solid track records and have been around a long time. Since they operate globally and in different currencies they offer some diversification and capture some of the earnings and growth potential of international markets.

"Therefore, it makes sense to include some foreign multinationals in your portfolio and the iShares S&P Global 100 ETF (IOO NYSE) is a cost effective way to do so. This ETF tracks a basket of 100 leading multinational companies with an average market capitalization of $69 billion. It offers good diversification with US companies at about 55%; the UK with 12%; France at 6%; Switzerland, Germany, and Japan with 5%. It is largely US and European oriented since this is where the largest multinationals are based. The annual expense ratio is only 0.4%.

"In terms of sectors, this ETF also offers good diversification with about 20% in financials, 16% in information technology, 14% in healthcare, 13% in consumer products, and 12% in energy. The performance of the Global 100 ETF has been a bit disappointing this year but it appears that large companies are coming into favor again. For example, the largest 10 companies in the S&P 500 are up 4% this year more than double the increase in the overall index. In 2003, this ETF was up 30.5% and so far this year it is down 0.9%. We have a 10% position in the Chartwell Global Opportunity model portfolio.

"Meanwhile, our latest country focus is on Sweden. The MSCI Sweden iShares (EWD ASE) in our Global Opportunities and International Opportunity model portfolio is an unusual blend of capitalist vigor and paternal socialism. It is a land of hardy and stubbornly independent people who live in a country the size of California with a sub-artic northland. Sweden's economy is on the mend, and it has somewhat reined in spending and kept its edge in the areas of autos (Volvo), telecom (Ericsson), engineering and machinery, processed foods, and paper and pulp. Swedes have a life expectancy of 80 years and a literacy rate of 99%, amongst the highest in the world. We’d note that Sweden has not participated in any war in almost 200 years.

"Sweden has a balanced budget but accumulated national debt represents just over 50% of GDP (about average for OECD countries). And 50% of Sweden's power needs are supplied by hydroelectric power. In September 2003, Swedish voters overwhelmingly rejected joining the euro system. The Swedish krona remains proud and independent. The Swedish stock market has been strong this year reflecting low interest rates, higher exports, stronger economic growth (3-4%), and an inflation target of 2%. Provided that Sweden continues to show fiscal constraint and social spending does not erode its other attributes, it is a solid and prudent addition to any global portfolio. The MSCI Sweden iShare ETF was up 64.2% in 2003 and thus far in 2004 it is up 14.6%.

"Of particular interest, Barclays Overseas Investors has introduced their newest iShare and the first ETF for China. The iShares FTSE/Xinhua China 25 Index (FXI ASE) is comprised of 25 of the largest and most liquid Chinese names. FTSE is a UK-based index company and Xinhua is a China-based media company. All of the 25 stocks included in the index trade on the Hong Kong Stock Exchange. Some of them are incorporated in mainland China (H shares) and some of them are incorporated in Hong Kong (red chips). The total market capitalization of the index is $170 billion. The broadest Xinhua China index includes 1,355 listed companies with a total market cap of $550 billion. To put this in perspective, the average market capitalization for a company in the S&P Global 100 index is $70 billion. Again, that’s for one company.

"We welcome this new tool to invest in China but hasten to point out the China iShare provides good exposure to three key sectors of China: energy (20%), telecom (19%), and industrial (18%). This concentration can be viewed as a plus or minus depending on your perspective. For example, some smart investors are placing a bigger bet on China’s consumer markets. We’d also note that the China iShare is a much purer China play than the iShares MSCI Hong Kong Index (EWH ASE), which has more emphasis on Hong Kong real estate (33%), utilities (17%), and banking (16%).

"Meanwhile, the annual operating expenses of the China iShares are from 50% to 70% lower than other alternatives out there including actively managed Asia and greater China region funds. Finally, we’d caution that investors should be aware of the high concentration involved in the China iShare. The top five companies represent 40% of the index. Overall, this ETF is rather like a rifle approach rather than a shotgun approach to investing in the China story. Rather than a core investment tool, it should probably be used as a complement to a broader investment approach."

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