It’s the problem that won’t go away if you’re looking to build a diversified portfolio of ETFs (or any other asset) to manage the risk that some one asset class will implode unexpectedly.
Given the continued outperformance of U.S. stocks, How do you diversify toe manage risk without giving up too much in current performance?
Back in April 2020, I “solved” this problem for the very passive Perfect 5 ETF Portfolio on my paid JubakAM.com site by adding the iShares China Large Cap ETF (FXI) to the portfolio. The intention was to add a non-U.S. asset to the mix while getting better performance for the portfolio than looked likely from adding, say, an emerging markets ETF.
This thought worked reasonably well–until the Chinese government came down hard on the country’s big Internet and technology companies.
And that has turned this large cap China ETF into a decided performance drag. In the last month, for example, the ETF has dropped 10.29%.
My read, too, is that the downward trend in China’s stock prices isn’t over. The government looks to have another turn or two of the regulatory screws in mind, and the Chinese economy looks to be slowing in the last two quarters of 2021 from earlier forecasts of 8%+ growth.
So today, I’m selling the iShares China Large Cap ETF out of the Perfect 5 ETF Portfolio on the JubakAM.com site with an 8.43% gain since I added it to the portfolio on April 20, 2020.
And I’m replacing this ETF with the iShares MSCI Europe ETF (IEUR) in the portfolio. Europe (and this fund includes the United Kingdom in the mix) lagged behind the U.S. in vaccination rates until very lately. And it has also lagged behind the economic upturn in both China and the United States. Right now, though, Europe is making up some of the lost ground and so is the ETF. The ETF is up 2.04% in the lat month and 4.39% in the last three months and 16.65% in 2021 to date as of August 3. The ETF changes a very low 0.09% fee and hows a yield of 2.4%.
For the moment, I’m keeping my allocations static in the portfolio. The iShares MSCI Europe ETF will start out with the 25% allocation that the iShares China Large Cap ETF had when it was in the portfolio.
