Real GDP and Debt Levels Point to U.S. Strength

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Diversifying a portfolio while maintaining returns is never a simple feat. By looking at the debt levels and underlying growth rates it becomes clear that some nations are better positioned for growth. Over the past couple years the low real GDP growth in the United Kingdom and higher growth in the United States and Canada has highlighted the need for targeted diversification. International broad market ETFs help to decrease the volatility that a singular national event like the Fukushima disaster can have. With debt levels and real growth figures in mind it becomes clear that some nations like Canada and the U.S. are better situated for growth.

Debt to GDP Ratios 

<table> <tbody> <tr> <td> </td> <td>Household</td> <td>Non-Financial</td> <td>Government</td> <td>Financial</td> </tr> <tr> <td>Canada</td> <td>91</td> <td>52</td> <td>69</td> <td>60</td> </tr> <tr> <td>United States</td> <td>83</td> <td>77</td> <td>90</td> <td>39</td> </tr> <tr> <td>United Kingdom</td> <td>96</td> <td>110</td> <td>92</td> <td>197</td> </tr> <tr> <td>Germany</td> <td>60</td> <td>50</td> <td>86</td> <td>91</td> </tr> </tbody> </table>

Data from the economist.

Understanding the debt levels of a nation is a key aspect of the economy. If the recession of 2008 has taught anything it is that debt matters. De-leveraging is a major priority of households and current debt levels are causing major problems in Greece and Spain. Canada and the US have the highest real growth rates out of the four countries. Canada's higher household and Financial debt to GDP ratio does create some concern. These factors allude to Canada's housing bubble which appears to be ready to burst. The United Kingdom's debt levels look completely horrendous. Household, non-financial, government, and financial debt to GDP levels are all the highest in their class. Coupled with their low real GDP growth the fundamentals do not paint a pretty picture. Germany's domestic debt levels are very reasonable with the household debt to GDP ratio at 60% and the non-financial sector at 50%. Europe's troubles are very concerning for Germany's growth prospects as the EU consumes 63% of Germany's exports. The recent decrease in Germany's real GDP growth confirm that the EU's problems are starting to infect the nation. 

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Canada Real GDP Growth data by YCharts

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^TSX data by YCharts

The Various National ETFs 

The U.S. and Canada are some of the best places to look for growth. For American broad market ETFs the standard S&P Depository Receipts (NYSEMKT: SPY) is a solid option. The low .1% expense ratio is one of the lowest fees available. The ETF is highly diversified with over 500 holdings and the top holdings are the standard large caps like Apple, Microsoft, GE, IBM, Chevron, and Johnson & Johnson. Given the estimated 3-5 year EPS growth rate of 10.62% and an average long term price to earnings ratio of 15 this ETF is a solid option. 

iShares S&P 100 Index (NYSEMKT: OEF) is a large cap ETF with slightly higher expense ratio of .2%. The fund's average price to earnings ratio  of 18.47 and price to book ratio of 4.25 are notably higher than SPY's price to earnings ratio of 15.03 and price to book ratio of 2.16. Since 2010 SPY has given a greater return than OEF. Given SPY's cheaper valuation on a price to earnings ratio and price to book ratio and relatively healthy level of financial and household debt this ETF is in a very positive light. De-leveraging will continue in the American household sector but relative to the U.K. and Canada their prospects are better. 

Outside of the U.S., Canada appears to be in the best position for future growth. If it weren't for Canada's housing bubble iShares MSCI Canada Index (NYSEMKT: EWC) would be a clear winner. 33.02% of the fund's holdings are in the financial sector. A large number of these financial holdings are in Canada's large banks which have a great amount of exposure to the consumer sector. EWC does not appear to be a great option given the housing sector's underlying weakness. The .52% expense ratio is not extremely high though it is 4 times that of SPY. In addition to all of these factors the average price to earnings ratio is high at 19.95. A better to invest in Canada would be to look at an energy ETF or basic materials ETF which has a large majority of their holdings in Canadian firms. 

iShares MSCI United Kingdom Index (NYSEMKT: EWU) and iShares MSCI Germany Index Fund (NYSEMKT: EWG) have preformed significantly worse than Canadian or American broad market ETFs. EWU has an expense ratio of .52% while EWG is similar at .51%. EWU has a reasonable price to earnings ratio of 15.07 but given the high price to book ratio of 3.36 and extremely high debt levels throughout the private sector this ETF has a significant amount of risk. The German EWG does not appear to be in a better situation. Its price to earnings ratio of 18.08 is higher than that of SPY while EWG's price to book ratio of 2.12 is about the same as SPY's. Germany faces a great number of difficulties from the economic downturns throughout the EU and at current valuations EWG does not compensate for this risk. 


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OEF data by YCharts


Canada and the US are some of the better developed nations to invest in during these current times. They have maintained relatively strong growth rates and are not as affected by the PIGS (Portugal, Itialy, and Spain) as their European cousins. The SPY is currently trading at reasonable price to earnings ratios at the long term average of 15. Given EWC's high exposure to the Canadian financial sector and the fact that Canada's housing bubble still needs to deflate EWC has many negative factors. A more effective way to invest in Canada would be to look at commodity or basic material ETFs which have significant Canadian exposure. Investing internationally is a great way to add diversity and strength to a portfolio but it is very important to only invest in countries with stability and growth. The U.S. and Canada fit the bill but American broad market ETFs like the SPY are the best options. 

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