Going Global with ETFs

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Either ETF can look cheap compared to a number of their traditional counterparts. "Some actively managed emerging market funds have extremely high expense ratios," says Eve Kaplan, a Berkeley Heights (N.J.)-based financial planner. "The ETFs are a good cost-effective alternative for some investors."

Particularly after emerging markets' recent strength, investors should remember that these stocks can be highly volatile. "People tend to buy them when they're hot, like right now, and then dump them the moment they start disappointing," says Morningstar (MORN) ETF analyst Dan Culloton.

3. Take a regional view.

Still, some investors have reservations about how the major international indexes are composed. Whether your quibble is with MSCI Emerging Markets index's inclusion of Russia or the MSCI EAFE index's weighting to Europe, ETF providers also offer region-specific funds for more neatly calibrated exposure. Be careful, though, because simplicity is probably a better bet for most typical investors.

The $25.9 billion Vanguard European Stock ETF (VGK) and $12.3 billion Vanguard Pacific Stock ETF (VPL) provide low-cost ways to fine-tune exposure to Europe, Asia, and Pacific nations such as Australia and Japan. "I really love Vanguard's offerings because they allow me to slice and dice the international markets better than the EAFE index," says Michael Dubis, president of Michael A. Dubis Financial Planning in Madison,Wisc. Both Vanguard portfolios carry low expense ratios of 0.18%.

4. Head to the country.

Nevertheless, certain investors might not want to limit their asset-allocation strategy to the regional level. With ETFs, they don't have to. A growing number of country-specific ETFs allow investors tweak their stock exposure on a country-by-country basis.

David John Marotta, president of Charlottesville (Va.)-based Marotta Asset Management, says he invests in ETFs for the 10 countries recognized each by the Heritage Foundation for having the most economic freedom. These include iShares Hong Kong (EWH), iShares Singapore (EWS), and iShares United Kingdom (EWU), among others. Each of these funds carries an expense ratio of 0.54%.

However, analysts and financial advisers frequently caution against average investors trying to beat the pros by dabbling in country-specific ETFs. "The right way to use ETFs for international exposure in a portfolio is to shun the single country funds," says James Sonneborn, wealth manager at RegentAtlantic Capital in Chatham, N.J. Instead, Sonneborn recommends a simple international portfolio component based on the more broadly diversified foreign ETFs.

5. Consider real estate.

As ETFs continue to proliferate, one emerging segment is international real estate. State Street Global Advisors recently rolled out its SPDR Dow Jones Wilshire International Real Estate (RWX) ETF. Just introduced last month, the fund tracks the Dow Jones Wilshire ex-U.S. Real Estate Securities index.

While investors should probably wait for it to build up a track record, some financial planners say the fund could be a savvy play for additional overseas diversification. RWX carries a 0.6% expense ratio, and its underlying benchmark boasts five-year average annualized returns of 29.19%. "I'm not putting it in any client portfolios yet," says Dubis, who likes the product but is taking a wait-and-see approach. "People have to be very careful."

As the world of ETFs keeps getting bigger, these funds remain an inexpensive choice for investors trying to keep up with the fast-changing global economy. With luck and some careful decisions, the added foreign flavor could lead to some appetizing returns for investors.

Hogan is a reporter for BusinessWeek.com in New York.