This seems to be an issue that just won’t go away: whether international diversification still has value. As you’ll see, whenever these articles pop up, you need to take a closer look at their argument to see if it’s valid. This latest one, like most of the others, just doesn’t seem to hold up.
Recently, Jim Pyke of Seeking Alpha lamented that the diversification benefits of emerging markets have declined. He noted that from 2003 through 2005 he “piled in” to China (via the iShares Trust FTSE China 25 Index Fund, FXI) and Brazil (via the iShares MSCI Brazil Free Index Fund, EWZ), as well as the Vanguard Emerging Markets Index Fund (VEIEX). While he noted that the returns have been good — from January 2003 through June 2011, the MSCI Emerging Markets Index returned 20.3 percent per year — correlations have increased substantially. For example, for the period 1988-2002 the quarterly correlation of the MSCI Emerging Markets Index to the S&P 500 Index was just 0.60. However, from 2003 through June 2011, it increased to 0.85.
