Portable Alpha Daily

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Thursday, August 10, 2006

International Markets

International Markets have, up until the last few years, been more difficult to invest in compared to domestic equities. ADR’s were available, but currency and geopolitical risks inherent in such investments often deterred investors from incorporating them into their portfolios. With globalization, the advent of foreign-index correlated mutual funds, and more recently international exchange traded funds, investors are beginning to increase their exposure to markets outside of the U.S. This is an excellent idea, not only in terms of increasing portfolio diversification, but also in generating excess alpha.

The international market arena, at least within our analytic software, is broken down into European and Ex-European markets. Emerging markets, which for the most part include South America, Asia, Africa and Eastern Europe, are much like small-cap stocks in that they have the potential to provide the most alpha since they are normally less correlated to the domestic market, but they also carry the most risk.

The iShares MSCI Emerging Markets Index (EEM) is a great way for investors to add longer-term, broad-based emerging market exposure to their portfolios. EEM is up by more than 20% over the last year and was last upgraded to a recommended “buy” on Tuesday with a current Sell-Limit Watch of 87.41.

ETF’s representing specific international markets are suited to more aggressive investors. Our two highest rated Ex-European ETF’s today are the iShares FTSE/Xinhua China 25 Index (FXI) and the iShares S&P Latin America 40 Index (ILF). Currently we have stop-limits established at 73.52 for FXI and 128.20 for ILF.

The Europe international market arena, especially Western Europe, is more closely correlated to the U.S. market and as such typically provides less alpha. Investors looking for broad-based European market exposure should look to the iShares S&P Europe 350 Index (IEV). Although slightly down for the week, it’s up almost 17% over the last one year.

Again, for more aggressive investors, narrowing down international exposure to specific countries has the potential of providing greater alpha. As of this morning, there are eight “buy” rated European ETF’s representing specific countries with the top two being the iShares MSCI Spain Index (EWP) and the iShares MSCI France Index (EWQ).

Investing in international markets isn’t limited to just Exchange Traded Funds. Fidelity has several Europe and Japan stock funds, including the Fidelity Europe (FIEUX) and the Fidelity Nordic (FNORX) funds, which are both currently rated “buys.” ProFunds provides a few international funds such as the ProFunds Europe (UEPIX) and ProFunds Ultra Japan (UJPIX) funds. Because it seeks to correlate to twice the daily performance of the Nikkei 225, UJPIX has the potential to provide tremendous alpha to an investment portfolio.

Remember the key to generating “portable alpha” is to actively manage investments that don’t correlate to the overall performance of the market. If you’re an investor seeking to add alpha to your portfolio, international markets should most certainly be in your strategy. Have a great day.


  • Enjoyed Justin's post. Although there certainly are too many ETFs to cover and one has to select a limited few, I thought he did miss an important narrow sector European iShares ETF: EWO (Austria).

    I've been intrigued with EWO's exposure to eastern Europe, which can be a difficult emerging market to access. 21% of the index is Austrian financial consisting of two entities, the largest of which has an aggressively increasing presence in the former Soviet block nations. Having financial institution transparancy into somewhat murky eastern Europe is interesting.

    More importantly, EWO's risk measurements are pretty interesting, with an 11.30 alpha and a sharpe ratio of 2.21, all on top of a moderate 15.75 standard deviation.

    I wouldn't rule out central Europe indexes especially given this risk profile. Definitely take a look at it (but be aware it does have energy and telecom representation in the index as well).

    By Anonymous redherkey, at 6:08 PM  

  • Coincidentally, EWO was upgraded to a "buy" on August 8th. It's shifted back to a "neutral" rating since then, so its obviously experiencing some volatility at the moment. It'll be interesting to see what happens over the next few days. You're right on the money though. Finding an investment that provides exposure to Eastern European countries, especially with regard to their financials, is extremely interesting. Thanks for brining that to my attention.

    By Blogger Justin Lenarcic, at 6:41 PM  

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