Selecting asset class components – International equities

Selecting components for the sixth and final asset class, international (non-US) equities, was straightforward. There are a number of international equity ETFs. I chose an equal weighting of VWO and SCZ.

The stated goal of VWO is: “Vanguard Emerging Markets ETF seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in emerging market countries.” Here are the countries represented and their weightings:

Country Weighting
China 19.10%
Brazil 15.60%
Korea 13.60%
Taiwan 10.80%
India 8.50%
South Africa 7.30%
Russia 6.30%
Mexico 4.40%
Malaysia 3.00%
Indonesia 2.50%
Turkey 1.70%
Chile 1.60%
Thailand 1.60%
Poland 1.30%
Peru 0.60%
Colombia 0.50%
Philippines 0.50%
Czech Republic 0.40%
Hungary 0.40%
Egypt 0.30%

While this is a good mix of international markets, I do have some issues with the composition. First, neither South Korea or Taiwan should be considered emerging markets. According the the CIA World Fact Book, they rank 49th and 47th in GDP per capita (2009 estimate in 2009 US dollars).  Also, I fail to see the logic of ranking South Africa ahead of countries such as Indonesia or Chile.

The stated goal of SCZ is: “The iShares MSCI EAFE Small Cap Index Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, as represented by the MSCI EAFE Small Cap Index.” The top country weightings are:

Country Weighting
Japan 27.97%
United Kingdom 19.79%
Australia 8.61%
Germany 5.69%
Switzerland 4.40%
France 3.81%
Sweden 3.18%
Hong Kong 2.78%
Singapore 2.69%
Netherlands 2.67%

My reasoning for selecting a small cap index was to exclude multinational companies that have significant US exposure. Most of the small caps are truly local, thus they more faithfully represent local equity markets than large caps. Also, this index only includes developed markets.

By combining VWO and SCZ, I achieve true international equity exposure with a mix between developed and emerging markets.

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