Positioning for Index-Based Investments

I have mentioned in my investment bucket overview that index investing has a significant role and receives 30% of my total investment capital allocation. Although this blog is focused on dividend growth investment, today I will take liberty to discuss index based investing for my investment portfolio. As of today, I have invested very small portion of my portfolio in SPY, EEM, and EPI. The total cumulative capital allocation for index-based portfolio is less than 8% of my original capital (against my target of 30%). This under funding for index portfolio was on purpose because of my investing rule to never invest at historical highs. While I initiated started position, I did not continue to build it. I took a pause.

Now indexes all over the globe have fallen of the cliff across different markets, across different countries, and across different focus-based indexes have fallen of the cliff. If not all, then majority of them have fallen by at least 50% from their peak. With this reduction, I believe it is a good time to position my self with my choice of index funds and availability of sufficient funding. I am in the preliminary stage of identifying candidates and mentioned below are the ones I have on the list to look at (with expense ratio and number of securities in the fund as of February 2009)

The objective of my index portfolio is to capture the general performance of a given market. I would like my index portfolio to capture three basic global markets viz. (1) US equity market; (2) Foreign developed market; and (3) Foreign emerging market.

US Equity Market:

Here I already have a starter position in SPDR’s S&P500 index fund (SPY). I continue to believe this is optimal index fund for my portfolio. This gives me the representation of general equity market for United States. At this point in time, I will not be adding into my new position. I am continuing to wait for any signs of stability in US economy or any intangible visibility what will drive the next growth cycle.

Foreign Development Market:

This is one area where I have no index investments. I am invested in PID which is a dividend focused investment rather than a passive market capturing position. I am evaluating following index funds.

iShares MSCI EAFE index fund, EFA: (0.34% ER, 834 securities)

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI EAFE Index. The Fund has been created by Morgan Stanley Capital International Inc. as an equity benchmark for international stock performance. The index includes stocks from Europe, Australia and the Far East.

Vanguard Europe Pacific ETF, VEA: (0.12% ER, 968 securities)

The Fund seeks to provide a tax-efficient investment return consisting of long-term capital appreciation. The Fund purchases stocks included in the Morgan Stanley Capital International Europe, Australasia and Far East Index. The Index is made up of approximately 1,164 common stocks of companies located in 21 countries in Europe, Australia, Asia and the Far East.

WisdomTree DEFA Fund, DWM: (0.48% ER, 640 securities)

The Fund seeks to track the price and yield performance before fees and expenses of the WisdomTree Dividend Index of Europe, Far East Asia, and Australasia. This is WisdomTree’s own developed DEFA Index.

PowerShares FTSE RAFI Developed Markets Portfolio, PXF: (0.75% ER, 1004 securities)

The Fund seeks investment results before fees and expenses that correspond generally to the price and yield performance of the equity index called the FTSE RAFI Developed ex-US Index.

Foreign Emerging Market:

Here I have a starter position in WisdomTree’s India Earning Funds (EPI). In general, when we look at emerging market index funds, one will find that India has a very low representation (more on this in future post). I am interested in capturing the full potential of growth in India’s economy and its leading corporations. In one of my earlier post I provided a review of my analysis on why I selected EPI as my investment vehicle for Indian market. In addition, I am also evaluating following index funds.

Vanguard Emerging Markets ETF, VWO: (0.27% ER, 784 securities)

The fund seeks to track the performance of the MSCI Emerging Markets Select Index which consists of stocks that can be bought free of restrictions in 18 emerging markets in Europe Asia Africa and Latin America.

iShares MSCI Emerging Markets Index Fund, EEM: (0.72% ER, 342 securities)

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Emerging Markets Free Index. The Index is designed to measure equity market performance in the global emerging markets.

WisdomTree Emerging Markets Equity Fund ETF, DEM: (0.63% ER, 296 securities)

The Fund seeks to track the price and yield performance before fees and expenses of the Wisdom Tree Emerging Markets High Yielding Equity Index.

SPDR S&P BRIC 40 ETF, BIK: (0.5% ER, 40 securities)

The objective of the Fund is to replicate as closely as possible the total return performance of an equity index based upon the emerging markets. The Fund is based on S&P’s BRIC 40 Index. The Index is a market capitalization weighted index that defines and measures the investments in the universe of companies domiciled in the emerging markets of Brazil, Russia, India, and China.

iShares MSCI BRIC Index Fund, BKF: (0.72% ER, 176 securities)

The Fund seeks investment results before fees and expenses that correspond generally to the price and yield performance of the MSCI BRIC Index. The Index is a free float adjusted market capitalization index that is designed to measure the combined equity market performance in Brazil, Russia, India and China.

These will provide a good starting point for additional research. Some the key areas that need further analysis are factors such as number of securities, exposure to ADRs/GDRs or equities in native currency, expense ratio etc. I will analyze the structure of the funds vis-à-vis my objective of capturing general market performance. I will provide updates for each market (or asset class) as I move forward with the research.


Leave Your Comments




Personal Blogs - BlogCatalog Blog Directory ~