ETF Investing - Part 3 (Addendum to your existing portfolio)

This is Part3 in a multipart series exploring ETF investing. Click to read Part1 and Part2.

If you have already established a core portfolio and are looking for something that would let you get a quick exposure to say, another country, or another asset class, without taking on a significant risk, you can use ETFs. Certain scenarios include:

• International Exposure:

If you own only domestic US stocks, and are looking to diversify into international markets, an ETF like Vanguard All World Except US (VEU) can be a good bet. For that matter, using only 2 ETFs like Vanguard Total Stock Market ETF (VTI) and Vanguard All World Except US ETF(VEU), you can gain a diversified exposure to the entire world's capital markets.

If you are looking for a specific region exposure like Europe or Asia, you can take a look at the Vanguard European ETF (VGK) and SPDR S&P Emerging Asia Pacific(GMF) respectively. If you are bullish on Pacific countries like Australia, New Zealand etc, you can invest in Pacific-ex Japan ETF like iShares MSCI Pacific ex-Japan (EPP).

If you are looking for country-specific exposure like India or China, you have the iPath India ETN (INP) (currently there is no ETF for India, but for all practical purposes, you can consider this ETN as a viable alternative) and iShares FTSE/Xinhua China 25 Index (FXI) respectively. However, if you think that India and China are bubbles, and would like to invest in Malaysia, South Korea or Middle East, you have the iShares MSCI Malaysia Index (EWM), iShares MSCI South Korea Index (EWY) and SPDR S&P Emerging Middle East & Africa (GAF)respectively.

• Market Cap Exposure:

Market caps can be divided into three categories - Large-cap, Mid-cap and Small-cap. Lets say that you have been a cautious and conservative investor so far and have a lot of large-caps like GE, Exxon Mobil (XOM), Verizon (VZ) etc., and now you decide to move into a slightly more aggressive field like mid-caps. However, you might want to be aggressive with minimum risk exposure by diversifying into a broad range of mid-cap companies - and guess what, Vanguard mid-cap growth ETF(VOT) comes to your help. Or you might want to have 50-50 exposure to mid caps and small caps, in which case you can invest in Vanguard mid-cap ETF (VOT) as well as Vanguard small-cap ETF (VBK).

• Sector Exposure:

If you are bullish on a specific sector, but dont want to risk your investment in just couple of stocks within that sector, you can choose to diversify using ETFs. If you are like me, you are probably bullish on oil and energy, and you can gain a good exposure to this sector using Energy Select Sector SPDR (XLE). If you are bullish on world technology, you can take a look at Technology Select Sector SPDR (XLK). If you are bullish on steel considering the rising demand from emerging economies, especially China, you can invest in the Market Vectors Steel ETF (SLX). If you like the prospects of healthcare companies in general, you can research more about Vanguard Health Care ETF (VHT).

• Shorting Exposure:

If you are bearish on the US Economy, just like Asif Suria is, you can still make money by shorting the entire S&P using UltraShort S&P500 ProShares (SDS). This ETF works inversely proportional to the S&P 500 index on a daily basis. If you think that small-caps have had their run and its once again time for the large-caps to run, you can invest in the UltraShort Russell2000 Growth ProShares (SKK). Instead of investing in short ETFs, you can instead also short any regular ETF - however, there are restrictions on doing this within retirement accounts, and thats where the short ETFs come in handy.

Part1
Part2
Part3

Interview with SINLetter's Asif Suria - Part 2

For Part 1 of this interview, click here.

Q. What is your general outlook on economy at this point in time - for the world in general and US in particular?

A. My general outlook for the US is negative. The GDP number that came out recently probably benefited more from inflation than it did from actual growth. Some market participants are speculating that the growth component was probably less than 1%. We have a huge budget deficit, a couple of wars with almost no allies, high personal debt through credit cards and HELOCs, low wage growth and still have to work off the excesses of the housing bubble (I am still seeing "cost per click" bids in the range of $13.83 to $19.53 for the keywords "no equity home loans" on Google). The only bright spot was the unusually high job growth number that came out last week. In case you are interested, the sponsored links for the search term "no equity home loans" on Google are from LendingTree.com (a division of IAC/InteractiveCorp that is hurting right now) and Countrywide Financial (CFC). I sometimes regret not rolling my Countrywide puts into new puts as I mentioned in this blog entry.

As far as the world is concerned, I believe that India and China are currently overvalued but I like Malaysia (EWM), Turkey, U.A.E, Israel and South Korea (EWY).

Q.If you were to recommend one stock for the next 5 years, which one would it be?

A. This late in a bull market I think it may be prudent to actually scale back on positions. Instead of individual stocks, I would prefer buying the water ETF PowerShares Water Resources (PHO) that consists of a group of 25 stocks that cover various water related investments ranging from desalination to bottled water. I picked this ETF for my November investment newsletter and as I usually tend to do, will add it to my personal portfolio as well. If I had to pick a stock, I would pick children's clothing retailer Gymboree (GYMB). I realized that retail stocks are extremely out of favor at this time but I think Gymboree is attractive at these levels.

Q. Do you think individual investors can beat the market over a long period of time like 20-30 years? Or should they just stick to index funds?

A. I believe if investors are ready to work hard and do their due diligence, they can indeed beat the market over a long period of time. I do not subscribe to the efficient market hypothesis and believe that you end up getting the good with the bad in a broad index fund. Index funds are useful tools for investors who have a moderate to low appetite for risk and cannot spend considerable amounts of time researching new opportunities or keeping track of their existing portfolio. They can also be useful tools for downside protection by using one of the UltraShort index funds like the UltraShort Russell 2000 (TWM) as mentioned in the September 2007 investment newsletter. As the Oracle of Omaha Warren Buffett once said "I'd be a bum on the street with a tin cup if the markets were always efficient".

Interview with SINLetter's Asif Suria - Part 1

Asif Suria is the founder of SINLetter (Suria Investment Newsletter), which is a free investment newsletter with a focus on international investing. I have been a loyal reader of this newsletter for the past several months, in which he highlights two stocks every month and provides excellent research for the same. His SINLetter picks have handsomely beat S&P, Nasdaq and Dow with total returns of 114.81% since inception in August 2005. You can subscribe to SINLetter here. He has been kind enough to agree to an interview for my blog, so folks, read on ....

Q.Can you tell us a little bit about your investing background - what got you interested, how did you start?

A.I can credit my dad for my interest in investing as some of my earliest memories were of him pouring over annual reports and financial newspapers. I used to deposit dividend checks for him in my teens and more than a decade before he retired, his income investing strategy was so well executed that he could pay for almost all our household expenses with his dividend income. I had been following the market for years and started investing in mid 2001 assuming that the dot com bear market was probably getting ready to go into hibernation. After a great start where I managed to get returns of almost 30% in a six month period (call it beginner's luck), things headed south and I lost a nice chunk of change. Thankfully this experience made me read almost every scrap of material I could find about investing and the markets. I learnt from my mistakes as well as by reading the works of gurus like Benjamin Graham and Peter Lynch.

Q. What was your first stock pick, and why?

A. My first stock pick was Oracle (ORCL). I picked Oracle because I was working as a data warehouse analyst at the time and understood the tech industry and specifically the database sector best. This has been something I have relied on ever since by picking stocks of companies that I have had some personal experience with or understand well. When I bought a Seagate external hard drive, I also bought the stock of Seagate Technologies (STX) since I realized that flash was not going to replace hard drives anytime soon as many on Wall Street feared. Since I used Ameritrade as my discount broker, I also picked up the stock after noticing their fat profit margins and high insider ownership. I often found great travel deals through Priceline.com (PCLN) and in late 2002 at a $1.51 (before the reverse split), I thought the stock was a great deal too. I have since sold all three stocks but they proved to be very profitable trades.


For part 2 click here.