Diversify Your Portfolio with ETFs From Abroad
Many of us are heavily invested in S&P 500 stocks, which have performed well year-to-date (SPY +27.5%). But how can one diversify in other markets outside the U.S.? Here are some ideas.
Here are the top performers (YTD):
FXI: +31.1% (China)
EWC: +18.2% (Canada)
EWJ: +12.0% (Japan)
Here are the underperformers (YTD):
EWZ: -26.6% (Brazil) - currently near lows
EWW: -24.7% (Mexico) - currently near lows
EWY: -17.6% (South Korea) - currently near lows
Emerging Market ETF (EEM), Mexico (EWW), and China (FXI) all currently have low levels of correlation with the S&P 500. For a portfolio heavy in U.S. stocks, the following might be a worth a look.
Diversification is about smoothing out the ups and downs of a portfolio and shielding against those big drawdowns.
If you’re looking to be a contrarian, consider the beat-up countries (EWZ, EWW, EWY). These might have upside potential.
If you’re a momentum trader, consider the best performers (FXI, EWC, EWJ). Options, as we've shown in studies, enable you to get better probabilities of success. Consider selling puts at approximately 30 deltas if you are bullish. Or, even buy 100 shares of stock and then sell a 30-delta out-of-the-money call above the market.
EEM ($43) Zebra Synthetic Stock (FEB) $3.98 Debit
Emerging markets have not participated in the upside move, compared to the S&P 500 near highs. With current IV in the teens, stock replacements become very cheap relative to an underlying with high IV. Long 2x the 41 calls, and short 1x the 43.5 calls, will provide over 100 delta of upside exposure for just $3.98 debit, and has a built-in long put at 41.
SPY ($602) Put Diagonal Spread (FEB/JAN) $5.78 Debit
Can Santa continue to push us higher through the end of the year? With volatility at the lows of the year and with prices at highs, it's as cheap as it has been to play for some downside. Long the FEB 600 put, and short the JAN 590 put, as this provides around -15 short delta and flat theta and profits from a stall in this upside move.
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Michael Rechenthin, Ph.D., (aka “Dr. Data”), managing director of research and development, has 25 years of trading and markets experience. He’s best known for his weekly Cherry Picks newsletter. On Thursdays, he appears on Trades from the Research Team LIVE.
Nick Battista, tastylive director of market intelligence, has a decade of trading experience. He appears Monday-Friday on Options Trading Concepts Live. On Wednesdays, he co-hosts Johnny Trades. @tradernickybat
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