Dollar Cost Averaging Into Asia

By Gregory S. Davis | September 23, 2008 AAA

Financial advisors often warn investors not to chase performance because the investments headed up today could just as easily fall tomorrow. The advice is sound and applies to both investments that are falling and others that are on the rise. We're going to examine a trio of exchange-traded funds with exposure to China that have each fallen more than 30% since the beginning of the year, but when the Dow Jones Industrial Average rose over 400 points or 3.87% on Thursday, September 18, each ETF rose more than 8%.

Instead of market timing, investors should consider dollar cost averaging their way into lagging emerging market ETFs.

Three ETFs To Watch
Since January Golden Dragon Halter USX China (AMEX:PGJ) has fallen the most among the ETFs we will cover, returning -45.03% through Wednesday, September 17. On September 18, when the Dow rose sharply on news of the U.S. government's decision to bail out insurer AIG the PGJ ETF rose 10.53% closing at $20.78. PGJ's long only positions in familiar names like PetroChina (NYSE:PTR) and China Mobile (NYSE:CHL) saw their stock prices move upward signaling that a strong U.S. economy makes for positive business sentiment in China.

The First Trust ISE Chindia ETF (AMEX:FNI) rose 8.55% on the day of the government bailout news after falling -42.64% for the year through September 17. Although FNI shares a few of its top holdings with PGJ, it also has a healthy allocation of companies based in India like Infosys Technologies (Nasdaq:INFY), ICICI Bank (NYSE:IBN) and Tata Communications (NYSE:TCL). FNI's exposure to India is an added layer of diversification that can soften some of the Asian market volatility.

Taking diversification a step further, investors should note that the iShares MSCI Emerging Markets Index ETF (AMEX:EEM) was up 8.43% on the day of the announcement closing at $17.14. With more than 40% of its country exposure split between Brazil, China and South Korea, EEM's diversification has allowed it to decline the least among the group of ETFs mentioned returning -36.31% since the beginning of the year. EEM's largest holding from each country mentioned include Brazil's Petroleo Brasileiro (NYSE:PBR), China Mobile and South Korean steel manufacturer Posco (NYSE:PKX).

Final Thoughts
The declines in emerging markets may not be over, and one of the best ways to avoid getting in at the wrong time is to spread your investment out over a few weeks or months. Investors should also consider the risk of a concentrated position like PGJ versus the somewhat smother returns offered from diversified emerging market funds like EEM.

To learn more, read DCA: It Gets You In At The Bottom, and Dollar-Cost Averaging Pays.

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