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Diversify Your Portfolio with ETFs From Abroad

By:Michael "Dr. Data" Rechenthin

Equities that don’t correlate with the S&P 500 can smooth out the ups and downs

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


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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.


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Diversification is about smoothing out the ups and downs of a portfolio and shielding against those big drawdowns.


Strategies to consider:

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.


Two trade ideas


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.

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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

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex and macro.

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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