ETF Expert

No Load Fund X, a 33-year old publication with an exceptional rating from The Hulbert Financial Digest, uses a concept called, "Upgrading." In brief, upgrading involves the ranking of funds by relative performance in several risk categories; one sells the lowest ranked funds and "upgrades" to the highest ranked funds.

In the May 2008 edition of No Load Fund X, two international funds were left hung out to dry. From the "Most Speculative Stock Fund" list, the iShares MSCI Malaysia Fund (EWM) finished near the bottom. And from the "Speculative Stock Fund" list, the iShares MSCI Sweden Fund (EWD) found itself in last place.

In the Fund X world, you would sell these funds immediately. You might then choose to upgrade to more recent champs like Brazil (EWM) or invest in broader exchange-traded baskets like Vanguard’s Emerging Market Fund (VWO).

The question, however, is whether or not these single-country ETFs are really so bad. For example, the iShares MSCI Sweden Fund (EWD) fell hard from its midsummer peak in 2007, losing 33% of its value. That was far worse than the 21% drop for the iShares Europe 350 (IEV). (This drop goes a long way to explaining why Sweden ranked so poorly in the No Load Fund X rankings.)

Yet technical and fundamental analysts might look at that huge fall from grace as a buying opportunity. After all, much of the excess drop was due to poor performance in telecom giant Ericsson (ERIC). And many have been looking at Ericsson’s low P/E and high ROE (return on equity) as a value play.

There’s more. The iShares MSCI Sweden Fund (EWD) boasts a collective P/E of approx 12. It has climbed roughly 26% off its February lows. And, as I type, EWD is likely to break through its 200-day moving average.

On the other hand, it’s hard to paint an equally rosy picture about Malaysia. Whereas the economic scenery had looked so splendid prior to March 2008, an unforeseen political disruption occurred when the ruling party lost its election and the prime minister refused to step down. The iShares MSCI Malaysia Fund (EWM) promptly dropped 10% on Monday, March 11, and has had difficulty finding traction ever since.

Personally, I find "Upgrading" a perfectly legitimate technique. It’s unemotional and systematic. What’s more, it has a long-term track record for capturing momentum.

Yet a portfolio that is constructed on relative strength rankings alone may take on questionable levels of risk. More importantly, long-term value opportunities might be missed.

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.