Recently I wrote an article in which I explain the reasons why you should invest abroad. These reasons included:
- Demographics: There are countries out there with young and rapidly growing populations that will drive economic growth at a rate that exceeds American growth.
- Valuations: There are foreign stock market indexes that trade at incredible discounts to the U. S. stock market.
- Regulations/Taxation: While America is considered the home of capitalism there are many countries out there that are trending toward capitalism as exemplified by their low tax rates.
Given these points I think investors should have a sizable portion of their portfolios in foreign stocks. In this article I point out three ETFs that I think investors should buy if they are interested in investing abroad. Before I list them, however, I should note that these are small-cap ETFs. Small-cap companies may be somewhat riskier, but they are also the best way for investors to get exposure to the national economies of foreign countries. Large-cap funds will contain global companies. For instance Royal Dutch Shell (RDS.A) is a Dutch company, but it isn’t a good way to get exposure to the Dutch economy because it is a global oil company. Small cap stocks are also generally less expensive and therefore more attractive.
1. Guggenheim China Small Cap ETF (NYSEARCA:HAO)
HAO trades at just 10.7 times earnings and 1.2X book value. This is an incredibly inexpensive fund that consequently has limited downside risk and leverage to China’s development into a global superpower. China has a relatively young population that is growing in number and in economic output.
While there are perpetual fears that China is “slowing” (what is really meant is that they are not growing as fast) or that their government lies about their statistics the fact remains that long term the Chinese economy is going to be the most significant in the world. Unlike in the developed world its citizens save a significant portion of their income, and it is a net creditor nation. Furthermore, despite recent setbacks the Renminbi is slowly yet surely appreciating against the U.S. dollar, and given that China is rapidly accumulating gold, I suspect that the Renminbi will be backed by gold in a few years. There will be setbacks in the Chinese economy and in Chinese stocks, but they should perform extremely well in the long term.