The past few years have shown many investors the importance of diversification and its role in proper portfolio construction. More recently, market turmoil in Europe and the “flash crash” in the markets last Thursday rocked virtually every asset class, sending markets plunging around the world. It is somewhat remarkable that events in Greece, a small country with a GDP roughly the size of Massachusetts, have had a huge impact not only on the rest of Europe but on world markets as well. These events have underscored how truly interconnected our financial system has become and how difficult it is to obtain uncorrelated equity exposure in the age of globalization.
While there has been much talk of ‘decoupling’ in the past few years, the fact remains that many markets remain highly correlated to the S&P 500. The German market, as represented by the iShares MSCI Germany Index Fund (EWG) maintains a correlation level of 0.90 with the SPDR S&P 500 ETF (SPY), while the iShares MSCI Brazil Index Fund (EWZ) has a similarly high level of correlation with SPY coming (0.91). However, some markets seem to be less in tune with the dips and advances of the S&P 500 than others. In particular, three country ETFs stand out as exhibiting a relatively low correlation with the S&P over the past two years (all correlation data from AssetCorrelations.com).
iShares MSCI Malaysia Index Fund (EWM, 0.76)
Malaysia finds itself in a unique position; a former British colony that is now an Islamic country with a heavy Chinese influence. Due to this mix of cultures and influences, the country is perhaps better able than most to weather recessions and economic disasters in other corners of the world. Moreover, the country’s status as a “rapidly developing economy” has allowed it to plow ahead as other economies encounter snags.
EWM is heavily weighted towards financial institutions which comprise 22.5% of the fund. Additionally, EWM allocates17% to industrial materials and 15.3% to consumer goods. However, of the fund’s 44 holdings none are engaged in software, hardware, or health care related activities. The fund is up about 40% over the past year and is one of the few in positive territory over the last month; it’s up 1.3% over the past 4 weeks (also see Malaysia ETF in Focus As Overhaul Plans Swirl).
iShares MSCI Thailand Index Fund (THD, 0.75)
Another Southeast Asian nation with a relatively low correlation to American markets is that of Thailand. While Thailand has undergone some political turmoil as of late, THD has weathered the storm quite well, producing a gain of almost 60% over the last year and an impressive gain of about 8% to date in 2010 (see more on THD’s returns). The fund, which holds assets in 86 securities, has just over 64% of its assets in its top ten holdings. THD has roughly one-third of its assets in financials, and another third in energy firms. THD is underweight in technology firms as well as health care stocks, all of which combine to make up less than 2% of the fund’s total assets (also see Three Country ETFs Ripe With Risk).
iShares MSCI Chile Index Fund (ECH, 0.69)
Despite suffering a massive earthquake near its capital Santiago, the Chilean economy has roared back; its blue chip index closed at an all-time high on May 12th, suggesting that the country is well on the path towards recovery. The Chilean economy is heavily focused on natural resources and its ETF reflects that; ECH allocates 26.8% to energy companies and 13.2% to industrial materials. The fund also has large weightings towards consumer goods (13.4%) and utilities (11.5%). Like the other ETFs profiled above, ECH offers minimal allocation to health care and technology stocks which comprise less than 1.5% of the fund’s total assets. Over the past 52 weeks ECH has posted a gain of about 35%. For more information on the Chilean economy, make sure to read Checking In On The Chile ETF.
Disclosure: No positions at time of writing.