ETF Expert

I'm not surprised by the sheer volume of questions that I get about commodity ETFs. China's buying up everything from common use metals to rare earth metals. It follows that lots of folks wish to buy what China buys.

Yet I found a straightforward "take" in Barron's that highlights the extraordinary investor interest in foreign stock. Indeed, twelve years ago, there were only 21 choices. Most of those involved large-cap, developed regions or single countries in Western Europe. Today, there there are 174 foreign ETFs on U.S. exchanges, many of which focus on economic sectors, emerging countries, small-cap exposure and fixed-income opportunities.

What's the reason for the enormous demand for international ETFs, particularly emerging market ETFs? For one thing, there is close to unanimous agreement that China, India and parts of Latin America have better economic growth prospects than developed economies. And, stronger economic growth often leads to larger capital appreciation in one's stock portfolio.

That said, Barron's made a leap-of-faith claim that "many [emerging markets] are less affected by the developed countries' housing, banking and auto crises." How do we really know that yet?

Granted, I do believe that emerging countries have the increased potential to "decouple" from the developed world going forward; nevertheless, the evidence on the "bear-to-date" shows that emerging markets are extremely affected by developed world crises while, at the same time, exceptionally resilient to global stimulus.

Charting the price movement of the S&P 500 SPDR Trust (SPY), the Europe 350 Index Fund (IEV) and the MSCI Emerging Markets Index Fund (EEM), it is easy to see that EEM fell further from top-to bottom than either SPY or IEV. In fact, in the heart of the developed world's credit crisis circa November 2008, emerging markets fell 60% versus the U.S. market's 40% decline.

When the credit crisis abated, and various worldwide stimulus efforts were enacted, emerging markets showed exceptional resilience. The MSCI Emerging Markets Index Fund (EEM) didn't set new lows in March of 2009, the way that the S&P 500 SPDR Trust (SPY) and the Europe 350 Index Fund (IEV) did set new March 2009 lows.

What can we definitively state, then?  We can say that emerging markets today are less affected by developed world recessionary realities. However, we shouldn't be too quick to say, without equivocation, that emerging markets are less affected by developed world crises. They may not be!

Truth be known, I feel that China, Brazil and a host of countries will be less affected by developed world crises in the future. The U.S. markets may actually follow the lead of Asia!

The problem with "buying into" a prediction is that it often leads people into buy-n-hold traps. You need to be ready to implement stop-losses to protect against dramatic declines, even in the international ETFs with the most potential for phenomenal gains.

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", via podcast or on your iPod.

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 Adviser 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.