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2008 Global ETF Outlook

Written By Brian Hicks

Posted December 31, 2007

There’s something you may not realize about many of my colleagues in the financial media. When the end of the year comes, they go away. But while the Journal and FT are filling their ranks with "second string" reporters and columnists, we here at Wealth Daily are attacking the markets and looking for 2008’s best bets.

Now is the time of year to take stock of your stock portfolio, but you should also look at your allocation to global exchange-traded funds (ETFs), whose popularity has grown hyperbolically as performance has equaled or beaten some of the market’s most celebrated individual stocks.

Since my primary focus is the international arena, let’s take a look today at a variety of global ETF choices as we turn the corner into 2008.

Sure, the Dow is set to end 2007 with its first losing quarter since 2000, so the iShares Dow Jones U.S. Industrial Sector Index Fund (NYSE:IYJ) and total market iShares Dow Jones U.S. Index Fund (NYSE:IYY) have seen better days. But as we see in the chart below, there is variation even between these plain-vanilla domestic funds.

IYJ IYY and Dow

The IYJ’s concentration in the industrial sector has given it an advantage this year (its General Electric allocation is six times that of the nearest holding), but will shabby durable goods orders hit IYJ harder in the new year?

The more broadly-based IYY is currently lagging behind even the pacesetting DJIA, but will this tortoise win the race in 2008?

Old Europe, New Markets and ETF Opportunities

Since 2000, some unfriendly sentiments have boiled up in the United States as regards our European allies, southern neighbors, and budding industrial giants in Asia.

But politics aside, the investment reality is that the hottest returns on Wall Street have come in imported packages.

Here we see two European ETFs, the iShares MSCI Sweden Index fund (NYSE:EWD) and iShares MSCI Spain Index (NYSE:EWP). Both Sweden and Spain are established industrialized members of the European Union. Both economies are growing between 3% and 4% per year in terms of real GDP.

But in the chart below we see the EWP is kicking the snot out of EWD.

Spain and Sweden ETFs

What gives?

International ETF Specifics

Well, the EWD, which is down about 5% for the past year, has mobile phone company Ericsson as its major holding, with about 19% of assets in the Swedish handset maker. That’s bad news, because NASDAQ:ERIC has gotten hammered since late summer, racking up a negative performance of nearly 42% since this time in 2006.

While the Sweden fund primarily plays, duh, Swedish stocks, it seems to be a little limited in its access to global growth (even though Ericsson is one of the top providers of handsets in developing economies as well as in the richer countries).

But with the Spanish ETF, we see the geopolitical angle on a European ETF play. Sweden’s never been big on colonies (unless you count some parts of Minnesota where you can hear "uff da!" as an expletive), but Spain’s got linguistic and historical ties all over the world. Now that the Spanish-speaking countries of Latin America are taking off, those lazos familiars (family ties) are paying off for Iberian companies like Banco Santander and Telefonica S.A.

EWP’s top banking holding, which also trades on the NYSE as an American Depositary Receipt under NYSE:STD, has a significant presence in the New World, and it’s now the largest bank in Europe by market cap.

While in Chile in March 2007, I met with credit specialists at the local offices of Dutch bank ABN-AMRO. Just after I left, Santander joined with the Royal Bank of Scotland and Fortis to acquire the Dutch giant and its Latin American operations.

Telecom play Telefonica (NYSE:TEF) has performed even better for the Spain ETF, showing its massive 81% return on equity in a beautiful trend-busting year-end rally.

Santander and Telefonica

Both TEF and STD have been home runs for the EWP, and their continued strong growth prospects as trans-Atlantic companies with low P/Es (TEF trades at just twelve times earnings!) make them great individual plays as well as all-star fund components.

As for New World ETFs, the Brazil-based EWZ has been a stellar performer this year, juiced up by top holding and Orbus Investor star pick Petrobras (NYSE:PBR). The Brazilian NYSE:EWZ has blazed to nearly an 80% gain this year!

India and China get plenty of mention in the emerging markets pantheon, but their ETF stories are complicated. The Indian stock market, based in Mumbai, has performed very well, but the primary Indian ETF, the Morgan Stanley India Investment Fund (NYSE:IIF), has sputtered.

India Fund

Half of the fund’s allocation as noted by research site is "other," and the other half may be spread too thinly across sectors. India’s fund is a perfect example of how ETFs are, after all, run by managers. You can’t always win with a broad-based bet on an emerging market. In Spain’s EWP, conversely, some heavy concentration in a couple of holdings pays off big–if those stocks do well.

With international ETF investing, just as with boring old domestic blue chips, due diligence is essential. But for those who play smart, profit potential abounds.

Happy New Year!

Sam Hopkins