By Mike Burnick

The exchange traded fund universe continues to expand globally. If you're a U.S.-based investor, and you're serious about diversifying outside domestic markets - and away from the sickly U.S. dollar - then that's a very good thing indeed.

The European ETF industry is on fire right now with new fund listings. Last year, the number of ETFs listed on European exchanges reached 412 total fund offerings, "with plans afoot to launch a further 59," according to the Financial Times.

It's Easier the Ever to Access Offshore ETFs

There were 119 new ETFs listed in Europe last year alone. Total ETF assets under management in Europe exceeded the €400 billion (about US$580 billion) mark for the first time in 2007. The big four ETF issuers in Europe were Barclays Global Investors, Lyxor, Deutsche Bank, and Easy ETFs. These four firms alone account for nearly 75% of the total market, but there are over 20 smaller players introducing new funds too.

Also, the Hong Kong Stock Exchange recently announced plans to begin rolling out more ETF offerings in Asia. Hong Kong's main bourse is also exploring plans to cross-list existing ETFs on other Asian exchanges, possibly including Taiwan and Korea.

Many U.S. online and discount brokers allow access to overseas exchanges, which includes the ability to buy ETFs listed in foreign markets. This provides even greater ETF investment choices for U.S. investors than ever before. EverTrade (a division of EverBank), Interactive Brokers, and E*Trade are just a few of the many brokers who can access these overseas listed ETFs for you.

But why would you to buy ETFs listed in London, Frankfurt, Tokyo, or Hong Kong when there are so many hundreds of ETFs to choose from right here at home? There are several very good reasons that I'd like to point out.

Offshore ETFs Can Give You Instant Diversification Out of the Dollar

First, like it or not, many U.S.-based investors have the bulk of their total wealth tied up in U.S. dollars. I'm not just talking about stocks and bonds either. If you live in the U.S., your business assets, residential and commercial real estate investments, even your pension or retirement funds, are probably denominated in dollars.

As we are all painfully aware, the U.S. Dollar Index lost more than one-third of its value just since 2001. This painful loss has just pointed out the danger of being dependent on dollar-denominated assets.

For this reason, many smart investors have opened offshore investment accounts where they can buy and sell global stocks and other investments in a variety of foreign currencies. The rise in offshore-listed ETFs makes it even easier for you to execute a low-cost and well diversified investment strategy in your offshore investment account.

Even for U.S.-based investors, buying ETFs listed on overseas exchanges makes a lot of sense. That's because foreign ETFs can offer you a profit double-play.

Let me explain. When you invest in an overseas ETF, you can profit as the ETF itself appreciates (in local currency terms), plus you can earn additional bonus gains on currency appreciation. Let me give you a recent example of how this principle works in action.

 

 

Fair Warning: All ETFs (and Indexes) are NOT Created Alike!

Last year in my research service Global Market Investor, I recommended subscribers diversify into commodity ETFs - one of 2007's best performing asset classes.

Now there are several commodity-backed ETFs listed here in the U.S. you can choose. But I was especially attracted to one listed on the Deutsche Bourse in Frankfurt, Germany.

I told my subscribers to BUY the Market Access Jim Rogers International Commodity ETF on the Frankfurt exchange. I chose this particular ETF because of the diversified index it tracks. Hedge fund legend and global investment guru Jim Rogers created this index himself in 1998.

In Rogers' view, most of the popular commodity indexes are flawed. These indexes don't offer true diversification because they're too heavily weighted in just a few resources, like crude oil and precious metals. That's how the Rogers International Commodity Index was born.

Rogers started his own well-balanced and broadly diversified index that includes 36 different commodity futures. The commodities in Rogers' index are weighted based on global consumption patterns, not popularity, and no single commodity has a disproportionate influence on the overall index. This approach makes a lot of sense to me. So I recommended subscribers buy it.

This is itself an important lesson to keep in mind when it comes to ETF investing. Remember that all ETFs are not created equal. It's not enough to buy the name alone. Make certain to check under the hood before you buy. Examine the ETF allocation and portfolio holdings carefully to make sure you're getting what's advertised.

How Global Market Investor Turned a Profit Double-Play in Commodities

Aside from my bullish outlook on commodities, the number one factor in recommending this ETF was the quality of the index itself, but a close second was a currency related factor that made this particular ETF even more compelling.

As I said, the Market Access Jim Rogers ETF is listed in Frankfurt and denominated in euro, not in U.S. dollars. The dollar was still in a freefall against the euro last year when I chose this fund. I believed this ETF's euro exposure would be a great way for investors to get a currency hedge. That's on top of great upside potential from booming commodity markets. With this ETF, you get it all in the same trade.

I'm delighted to say that's exactly the way things worked out. The Market Access Jim Rogers International Commodity ETF jumped a bit more than 12% in 2007, after I recommended it to subscribers in June. That's 12% in local (euro) currency terms.

Even better for U.S. investors, because the dollar continued its slide through most of last year, the extra euro currency appreciation handed investors a 23.8% total return in this Frankfort-listed ETF.

In other words, you doubled your total return if you invested in this overseas-listed ETF, rather than one of the U.S. listed commodity ETF equivalents.

That's a profit double play I'll take any day!