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With the S&P 500 Index ($INX, news, msgs) up almost 9% this year and more than 19% over the past 12 months, the U.S. market is churning out impressive returns. But that's nothing compared with what's happening in other parts of the world.
For instance, when I checked June 1, the S&P Latin America 40 index was up 28% so far this year and 64% over the past 12 months. Similar story in Singapore, where the local stock index was up 22% this year and 63% over the past year. It's not only developing countries that are booming. In Germany, the MSCI index was up 24% so far this year and 46% over the past 52 weeks.
Get a piece of the action
In short, many overseas markets are steaming. How do you get in on the action? Buying individual stocks in foreign countries doesn't make sense for most U.S. investors. It's hard enough picking good stocks here where we know the culture and understand the business climate.Exchange-traded funds (ETFs) are a good vehicle for investing in foreign countries. They are set up to emulate indexes that track the performance of stocks in individual countries or in entire regions.
For instance, the iShares MSCI Pacific ex-Japan Index Fund (EPP, news, msgs)emulates the performance of an index of 180 or so publicly traded corporations in Australia, Hong Kong, New Zealand and Singapore. In contrast, the iShares MSCI Australia Index Fund (EWA, news, msgs) tracks only Australian stocks.
By the way, MSCI stands for "Morgan Stanley Capital International," which is the group that came up with many of the indexes used to track foreign stocks. In 2004, MSCI acquired Barra and changed its name to MSCI Barra. But, thankfully, its indexes still use only the MSCI moniker.
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If you're not familiar with them, exchange-traded funds are similar to index mutual funds, but ETFs trade like stocks. You can buy and sell them any time the market is open, and you pay the same commissions that you would to trade stocks.
ETFs are gaining acceptance, and new funds are being introduced seemingly every week. At last count, MSN Money listed more than 300 ETFs.
You can use MSN Money's Performance Tracker just about any market niche. Start by selecting "Show All" to see the complete list of 300 or so ETFs.
That's worth doing because you can sort the list to show the top-performing funds for time frames ranging from one week to five years. By doing that, you can see which market segments are hot and which are not. I find sorting on 13-week returns the most useful for that purpose. I'll explain how this feature will come in handy in a minute.
Fund categories
You can narrow your fund selection to a particular category using the category drop-down menu. Foreign funds are listed in five categories:- Diversified Emerging Markets: contains funds specializing in China only, plus funds with holdings in Asia, Latin America, Russia and South Africa.
- Europe Stock: includes funds specializing in specific European countries such as Germany, the Netherlands, Sweden and France, plus funds emulating indexes that track major stocks in multiple European countries.
- Foreign Stock: funds tracking Latin American and South African stocks plus additional funds that don't fit other categories.
- Pacific Stock: funds tracking stocks in Pacific Rim countries such as Malaysia, Singapore, Japan, South Korea, Australia, Hong Kong and Taiwan.
- World Stock: funds that emulate indexes with a global perspective, including one fund emulating a Canadian stock index.
I found 46 ETFs in these five categories, with the most, 19, in the Europe Stock category.
How do you pick the best candidates? Selecting ETFs is similar to picking regular mutual funds in that you want to achieve the right balance of prospective returns versus risk. However, with ETFs, you have an additional consideration.
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What's an ETF?Exchange-traded funds offer new ways to invest and diversify, but not without some potential negatives.
With a managed mutual fund, if a particular market segment appears headed for the Dumpster, the fund manager can shift the fund's portfolio to a more promising area. However, since most ETFs track a fixed index, it's up to you to keep up with shifts in the market and adjust your holdings accordingly.
You can keep up with market shifts by observing hot and cold market segments using the strategy of sorting by 13-week returns that I described earlier.
Once you've decided on a category, you need to find the best prospects.
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