Winning Big with Country ETFs

05/22/2007 12:00 am EST

Focus: ETFs

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, president of Chartwell Partners, told attendees of last week’s Las Vegas Money Show how to boost their returns by using single-country exchange traded funds.

US-only investors will say there’s really no reason to invest outside the US—the US is clearly dominant in many, many industries. But half of world growth this year will be from emerging markets, [which have] 5% of the world’s population and 25% of global output but yet represent only 7% of the total value of stock markets in the world.

We don’t invest in just country ETFs. We weight [country ETFs] differently than the MSCI does it. The goal here is to pick which countries we think will do better than the MSCI world index.

The Brazilian market has been a very good performer, [and the iShares MSCI Brazil index (AMEX: EWZ)] even this year has been one of the top performing ETFs. If you look at the big global money managers in the emerging markets Brazil is the number one overweighted country.  It’s a little bit more expensive now: it used to be 9-10x earnings and now it’s more 12-12.5x. I mentioned earlier that emerging markets as a whole have grown 7.7% [annually]. Brazil has grown a little bit more than 3%. Brazil up to now has really been a balance sheet play. It’s in a much stronger position, with foreign reserves of $60 billion, it’s got close to a balanced budget, it’s at the sweet spot in commodities, foreign investment, a lot of things [are] going right, and yet the growth has been substandard. Up to now Brazil has been a balance sheet play and my hope is it’s now going to turn into more of a growth story. [Their bonds] are getting close to investment grade. (The ETF closed Monday at $59, a hair below its all-time high—Editor.)

I’ve been a little wrong about [the iShares MSCI Japan index] (AMEX: EWJ). Japan will really be a good market when the Japanese consumers regain their confidence. The Japanese market did very well in 2003-2006, but most of that was foreign money, institutional money. The economic numbers are better, the growth numbers are still a little bit weak, but they’re improving, the real estate market prices are going up. The big Japanese companies are doing great business in China, so it’s in part become kind of a China play.

The other problem is the yen is pretty weak. But at some point it’s going to turn around. I wouldn’t overweight Japan; in our Asia portfolio I have it at 15% but that’s still my largest single weighting. The other good thing about Japan is it’s not correlated to other markets; it goes by its own drummer and there’s a lot of cash sitting on the sidelines. So once it starts getting some momentum, it could really be a great market, but this year it’s been flat. (The ETF closed at $14.25 Monday, below its all-time and 53-week highs—Editor.)

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