ETF Expert

The general consensus on the fate of the U.S. dollar is that it will weaken over time. And some even think the demise will be dramatic. In fact, you'd be hard-pressed to find folks who believe the U.S. currency has a shot at strengthening in the years ahead.

There may be less agreement about the U.S. economy. Some argue that we were the first to enter the darkness, but that we'll be the first to see the light. Others believe that we'll be lucky to find ourselves muddling through years of stagnation. Nevertheless, there's few that believe that our economy will demonstrate enormous prosperity, even as we recover.

Ask yet another question about U.S. policy, and you'll hear near unanimity about the return of inflation. Projections range from higher-than-historical average (my camp) to out-n-out hyperinflation; the latter group sees commodities setting new inflation-adjusted highs that make the old commodity bubble look tame.

Weak dollar, stagflation — how can this bode well for U.S. stocks? Does this mean that investing in foreign securities should be one's major investing focus?

The mere fact that there are 3 All-World ETFs that exclude U.S. stocks demonstrates an interest in "everything BUT the U.S." That said, all 3 of these vehicles lag the U.S. S&P 500 over the last 2 years.

And there's more. Vanguard FTSE All-World Ex-US (VEU), SPDR MSCI All World ex-US (CWI) and SPDR S&P World ex-US (GWL) move along a near identical path as the overall U.S. stock market (S&P 500 SPDR SPY). With a correlation this high, few can even argue in favor of using these ETFs for diversification purposes.

Now, if you want diversification… that is, a lower correlation with other assets in your portfolio… one might have to head for emerging markets. If not that, one might have to cherry pick an individual country that is not as interdependent as all of the developing nations seem to be. (Or most notably, look to foreign bonds and commodities as non-correlating assets altogether.)

Granted, all stock assets were battered by the gruesome bear; yet countries like Brazil seem to be less dependent on the U.S., and perhaps more dependent on China. Whatever the reasons — sociopolitical, natural resource abundance, blind faith — at least you aren't stuck with the U.S.-Europe synchronicity in stock price movement.

The simplicity of all-in-one ETF investing appeals to many investors… at least at first glance. Still, one's success at diversifying within asset classes (e.g, small cap, large cap, international, emerging, etc.) as well as across asset classes (e.g., stock, bond, commodity, currency, MLP, real estate, etc.) may require something more than the all-in-one solution.

I DO NOT buy-n-hold-n-hope. So there's never a time when I simply rely on a permanent asset allocation or a historical diversification model.

That said, one should have targets for growth/income like 65/35. You modify the targets when circumstances or stop-losses suggest that… hey, raise the cash level and lower the stock component!

And one should certainly strive for non-correlating assets; for example, foreign fixed income via the SPDR International Treasury Bond Fund (BWX) shows no correlation with the S&P 500 over time.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

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.