ETF Expert

In 2007, emerging market ETFs made a whole lotta money. Yet most of that success came in the first 3 quarters.

The iShares S&P Latin America 40 Index (ILF) didn’t go far in the fourth quarter. And for that matter, the Asia Pacific region vis-a-vis the iShares MSCI Pacific ex-Japan (EPP) headed south of the flat line.

Meanwhile, there’s one region that managed to flourish in Q4 07: Eastern Europe. The SPDR S&P Emerging Europe (GUR) finished the year only a few percentage points off its 52-week high.

In 2008, SPDR S&P Emerging Europe (GUR) continues to show solid demand. It "held serve" on January 2, when most domestic and foreign stock indexes fell with a "kerthump." And today, it gained 1%+ in early trading. It’s almost as if countries like Austria, the Czech Republic and Hungary have won "immunity."

Not exactly. Eastern/Central European investors need to thank the surge in crude oil for their success.

I wrote about SPDR S&P Emerging Europe (GUR) back on December 13. In essence, GUR is a sector fund with its 50% allocation to energy. It has 25% in one company, Russia’s Gazprom, and 60% in Russia alone. Investors who may worry about thin trading might do just as well to invest in the high volume leader, the Market Vectors Russia ETF (RSX).

If one is comfortable with the oil/commodity reality that anchors SPDR S&P Emerging Europe (GUR), one should continue on the journey. However, I’ve seen far too many portfolios that include 4 or 5 different investments, each of which is another version of the oil play.

For instance, one might have made a great deal of moolah with the portfolio below. Yet the overlap and utter lack of diversification would make any risk manager cringe.

If you own US Oil (USO), Russia (RSX), Eastern Europe (GUR) and the Select Energy Spider (XLE), rethink what you actually have in your bread basket. Why? Because you’ve got energy sixteen ways come Sunday.

Again, this isn’t a knock on a particular region or a particular sector. You SHOULD have exposure to energy. You SHOULD have exposure to emerging regions. And you should have exposure to commodities.

However, if you’re looking for a smoother ride, or if you are wary of being overexposed, think about the following two ETFs in your portfolio:

1. The Dow Jones-AIG Commodity Index (DJP). Commodities come in a variety of shapes, sizes and colors. This total commodity index offers a way to get oil, gas, steel, silver, wheat, soybeans… all in one investment. (More on DJP here.)

2. The Vanguard All-World Index (VEU). Domestic mutual fund managers rarely beat the S&P 500 for an extended period of time. Similarly, emerging market enthusiasts are unlikely to out-pick the all-world index over a sustained period of time.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.