Interchangeable Country Funds and Sector Funds (EWC, XLE, EWT, IXN, EWA, XLB)

You’re trying to increase your international exposure. You like the returns coming out of a particular country. And you set your sights on buying an exchange-trade country fund.

It’s only natural. After all, we hear endless publicity about the strength of the global economy.

So why not get a piece of Canada? Is there any reason you shouldn’t consider Australia? And the Republic of China known as "Taiwan?" Now there’s a little engine that could!

Truth be told, all of these individual countries DO represent opportunities in the global economic growth story. Yet there’s an ironic twist that many investors overlook; that is, many single-country ETFs correlate highly with the price movement of common economic sectors.

With the weakness of the U.S. dollar relative to the Aussie dollar, you might be inclined to believe that tourism is a primary driver behind the success of the iShares MSCI Australia Index (EWA). Think again.

The prominence of Australia as a major supplier for materials and resources to the Asia/Pacific region makes EWA somewhat indistinguishable from the Materials Select Sector SPDR (XLB). (The 2-year chart gives plenty of credence to this viewpoint.)


Another prominent thesis is that Taiwan (Republic of China) is a great way to gain access to the success of the mainland (The People’s Republic of China.) Not exactly.

Taiwan has far more in common with Israel; that is, these countries are not emerging markets, but rather, developed hotbeds of technological advancement. It follows that you’ll find an exceptionally high correlation between the iShares MSCI Taiwan Index (EWT) and the iShares S&P Global Technology Index (IXN).

Last, but hardly not least, Canada has been on an exceptionally vibrant ride over the last 4+ years. Still, if you thought that the performance of the iShares MSCI Canada Index(EWC) had much to do with a well-balanced economic agenda, you’d be overshooting.

Canada is all about energy demand. That’s why there’s very little difference between ownership of EWC and the Energy Select Sector SPDR (XLE).

In no way do I mean to suggest that international investing is unnecessary… quite the opposite, in fact. Nevertheless, if you want to make sure that you are diversified across your domestic and international holdings, you need to be keenly aware of the overlap in certain exchange-traded fund (ETF) investments.

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. 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.

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