Often referred to as “Mr. Retirement,” Robert Powell is a long-time financial journalist...
Beating the S&P and Hedging Risk Abroad
11/05/2007 12:00 am EST
Richard Lehmann, editor of the ISA ETF Investor, finds one ETF that beats the US benchmark index over the years and another that spreads risk widely over the globe.
The PowerShares Value Line Timeliness Select Portfolio (AMEX: PIV) fund, [which] was started December 6, 2005, uses Value Line rankings to make its selections and adjusts its portfolio quarterly.
The fund's performance relative to the Standard & Poor's 500 is variable over the years. The ten-year comparison reveals a 15.36% annual rate of return for Value Line versus the S&P 500's 7.13%; the three-year comparison is 14.40% versus 11.67%. However, in a one-year comparison the S&P beats Value Line 20.59% to 10.93%.
The Value Line fund correlates 0.73 with the S&P 500, which is less of a correlation than expected, meaning the fund offers some diversification from the S&P 500. Another nifty feature of the fund is the ability to see the intraday movement of the underlying index by using the quote symbol JDV.
The tried and true Value Line concept has been around for at least 30 years and has produced competitive returns over that period. The fact that [this fund] topped our best performers list this month [with a 9.8% return] just serves to bring the idea to the foreground.
The skittish and volatile market we have experienced since July is well suited to a sector-rotation strategy. The fact that Value Line is involved with the sector selection adds some comfort to the suggestion. (It closed below $19 Friday-Editor.)
[Meanwhile,] we think the explosive growth of the China sector is starting to look like a bubble. Two consecutive months of 20% gains seems excessive, especially when considering the risk of a Communist dictatorship that may act in unpredictable ways. In addition, the reputation of Chinese-made goods has suffered in recent months.
We sure wish there was a ProShares UltraShort China fund available. Since there isn't, we remain cautious about our international recommendation. A fund that spreads risks over the global economy might moderate any damage from a China meltdown.
We recommended such a fund, the iShares MSCI EAFE Index Fund (NYSE: EFA) in January 2006 at a price of $62.15. (EAFE stands for Europe, Australia and the Far East.) The fund is now trading [below $85]. The fund mainly tracks developed regions of the world and distributes its assets over different industry sectors.
The highest geographical concentrations are in the United Kingdom and Japan, each around 20% of assets. Industry diversification is 28% in financials and about 12% in industrials and consumer discretionary sectors. The fund is well diversified, with their top ten holdings accounting for only 17% of total assets. The expense ratio of 0.34% is competitive with other ETFs.
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