Where a company is domiciled is becoming less important; what industries and sectors it operates in is becoming more important.

Research shows that since the late 1990s, the importance of developed-country factors in determining relative returns is declining and sector factors are increasing.

For example, global sectors account for roughly 40% of total global equity return dispersion, up from 15% in 1992.

The case for country allocation is highest for emerging country markets since their companies are more tied to local economic and political factors. For example, the correlation of emerging country markets to the All Country World Index over the trailing 36 months in late 2006 was 0.4%, while for developed markets it is 0.7.

Growing global trade and investment flows are to a significant degree generated by the largest global companies. The volume of world trade has increased twenty-five-fold since 1950 compared with GDP growth of just under sevenfold.

World Parsed Into ETFs

The S&P Global 1200 and the 10 global sectors it breaks down into, all available through exchange-traded funds (ETFs), offer investors and advisors a transparent, liquid, flexible and low-cost approach to executing a global sector strategy.

Top Countries In The S&P Global 1200 Index

Source: Chartwell Partners

One recent practical example is the information technology boom and subsequent bust in 2000. In 1998, the global information technology sector was up 69% and in 1999 it was up 94%.

However, in 2000 it fell 40% while the global healthcare sector was up 31%.

The current uncertainty and pullback in the global financial sector is another case where an investor could outperform by underweighting this sector which accounts for 25% of the total index, and overweighting more defensive global sectors such as global utilities.

The Basics Of Global Indexing

The S&P Global 1200 is a composite of seven indexes which are considered as leaders in their respective regions.

The market values of the 1,200 companies in the indexes represent roughly 70% of the world's capital markets with a market value exceeding $28 trillion.

The following is a brief description of these baskets of companies:

• The S&P 500 covers 75% of U.S. markets.
• The S&P Europe 350 covers 70% of the region's market cap across 17 countries.
• S&P/TOPIX 150 covers 70% of the Japanese market.
• S&P/TSX 60 offers exposure to 60 large-cap, liquid Canadian companies.
• S&P/ASX All Australian 50 is comprised of 50 liquid, domestic-oriented Australian companies.
• S&P Asia 50 covers 50 leading companies in Asia ex-Japan domiciled in Hong Kong, South Korea, Taiwan and Singapore.
• S&P Latin America 40 is a basket of 40 companies from Argentina, Brazil, Chile and Mexico which offers exposure to 70% of the regions' market cap. It is heavily weighted to Brazil and Mexico.

The companies in the S&P Global 1200 are weighted by their market value. Research indicates that the average beta and standard deviations are higher for the country ETFs than for global sector ETFs.

Single-Country ETFs Along With Sectors

In addition to the 10 global-sector ETFs, another potential strategy is to use single-country ETFs and closed-ended funds which offer significant exposure to certain sectors.

For example, investors could select Canada for Energy, Belgium for Financials, Switzerland for Pharma and Taiwan for Semiconductors.

While not as clean an approach as using the global-sector ETFs, this strategy can be effective coupled with a foreign currency strategy and with the goal of gaining exposure to emerging markets or countries underweighted by traditional market-cap weighting, such as that used by the S&P Global 1200.

Global Sector Rotation Has Strengths, Weaknesses

Given its broad exposure to global equity markets and the opportunity to use a top-down macro analysis to challenge market-cap global-sector weightings, a global sector ETF rotation strategy is a very useful satellite growth portfolio.

Its weaknesses include its traditional market-cap weightings which offer only token exposure to many emerging markets, such as Brazil and Chile, and that it underweights smaller developed countries like Singapore, Ireland, Austria and Sweden.

Another more aggressive global-sector ETF option is what I call the "Barbell Strategy." The three global sectors that show particular price momentum and the three most out-of-favor sectors showing the weakest momentum are both over weighted. This strategy captures both momentum and value at the same time, with the four sectors in the middle underweighted in the portfolio.

Carl Delfeld is managing director of Chartwell Partners Asset Management. Delfeld has served as a consultant to the U.S. Treasury on Asian investment issues and as an international economist with the U.S. Congressional Joint Economic Committee. He also has been a representative of the United States on the executive board of the Asian Development Bank in Manila, Philippines.