Building Portfolios from Single-Country ETFs

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This article describes three major methods of investing in international equity markets. They include bottom-up stock picking, “hybrid” stock picking and investing in funds or ETFs that closely follow broad-based international indices. The article also describes the fourth, alternative, method of international equity investing: construction of portfolios from single-country equity ETFs.

The article compares selection of different ships for fishing with investment portfolios built using the four methods above. It describes groups of countries for which each investment method is more appropriate. Finally, the article talks about competitive advantages of building portfolios from single-country ETFs versus the other methods in such areas as potential reduction of risk of capital loss, flexibility of investment selection, speed of entering and exiting investment positions, and investment management fees. The full version of this article can be found here.

International equity investment methods

Just like fishermen who want to catch big fish, investors seek investments that bring them attractive returns. A fisherman’s choice of ships is important in determining whether and where he will be successful in catching fish; similarly, an investor’s choice of building blocks for her portfolios and methods used to develop these portfolios in large part determines whether and where the investor will be successful in generating attractive returns.

Most choose to invest in international (developed, emerging and frontier market) equities using one of three dominant methods to create portfolios from two major building blocks: individual stocks or ETFs. Investors who invest in individual stocks usually use one of the two methods: bottom-up individual stock picking (see Method 1 in Table 1) or hybrid individual stock picking (see Method 2 in Table 1). Investors also invest in international equities using broad-based indices (see Method 3 in Table 1).

My firm developed a new method of investing in international equities using single-country ETFs (see Method 4 in Table 1). Table 1 demonstrates how the investment strategies are characterized by four major factors: potential reduction of capital loss risk, flexibility of investment selection, speed of entering and exiting investment positions, and investment management fees. Table 1 also provides comparisons of each investment method with characteristics of a fishing ship.