ETF Expert

Kyle Waller believes that global investment returns can be explained by investigating economic segments. And he presented some pretty sharp data to back up his convictions in an editorial at Index Universe.

Here’s a quick summation of the facts: The iShares ETFs have 10 global sector funds. In the 5-year period from 10/31/04-9/30/09, all 10 of the global sector funds produced better total returns than U.S. sector fund counterparts; one-half of the global sector investments did so with less risk. (Standard deviation is used as the risk measure.)

The Morningstar data is pretty straightforward. What’s not so clear-cut is the interpretations that one could make about the numbers.

For instance, how much of the total returns are actually attributable to more robust equity performance rather than currency gains? Or, does the credit crisis that originated in the U.S. make domestic equities appear more volatile in a 5-year period… as opposed to how those results might have appeared over a 25-year time frame?

In other words, one shouldn’t be quick to conclude that “going global” actually reduces equity risk. In addition, the total returns over the last 5 years are negligible here… and they are not consistent with nearly any of the rolling 5-year time periods one might have looked at over the last century+.

There’s more.

All of the domestic sector funds trade millions of shares daily; price execution at a nominal bid/ask spread is the norm with the State Street SPDR domestic sector funds. In contrast, the majority of the iShares global sector funds have wider bid/ask spreads due to lower volume and limited assets under management. That amounts to a hidden fee in the purchase and/or sale of the ETF, often as high as a 1% round-trip. Point being… trading in real life cannot necessarily be account for by research on investment returns.

Nevertheless, if you ask me about iShares Global Energy (IXC) and iShares Global Materials (MXI)… I will tell you that there’s sufficient trading volume for excellent price execution. I would also tell you that they’d be excellent ways to pursue a global equity approach to worldwide natural resource companies. And… if some of those gains come from foreign company profits in appreciating currencies over the weakening U.S. dollar… that’s okay by me!

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.

Tags | "etfs global", "international energy etf", "IXC", "material etf", "MXI, Energy ETFs, Global ETFs