By Bruce Zaro 

Over short periods of time all financial markets rise and fall, but the natural volatility of asset classes varies widely.  While investors may define  risk as a favored stock going bankrupt or experiencing a post-2000 Tech boom meltdown, I look at day-to-day risk management in a different way: not only the expected variability in the price of an asset class but one's tolerance for it. Steps can be taken to minimize risk but volatility itself should not be considered a four-letter word.

Along these lines and of little surprise to most, I'm sure, is the fact that non-U.S. equities tend to fluctuate more widely than US assets, (they have a higher beta).  Thus, the definitive sign of an investor who truly understands this fact will be his or her willingness to live with the increased volatility that comes with foreign holdings. Allowing these international holdings to experience their measured volatility has kept us in many of the strongest overseas holdings over the last few years.

International markets have been the place to be since 2000. While the superior growth rates have been attributed mainly to China and India, investors should not overlook the booming Middle East as typified by Dubai's dramatic skyline in the Gulf, Latin America and South Africa, and emerging Eastern Europe including the former Soviet Bloc and Russia. Take Poland, for example: as the economy has been liberalized it has experienced the one of lowest inflation rates in the EU, according to the World Fact Book. Exports have more than doubled since 2002 even in the face of the zloty appreciating by 30%. GDP was 6.1% in 2006.

For those wishing to access Eastern Europe most simply, they might want to take a look at the S&P Emerging Europe ETF (GUR), which has a 40% representation in these new tigers (12% in Poland) and is up approximately 19% year-to-date. It has exhibited excellent relative strength compared not only to U.S. markets but to many of the other regional and country-specific ETFs we follow.   Our International ETF model uses this critical evaluator (relative strength) in managing our International Rotation Portfolio. Identifying, overweighting and sticking with the strongest performers despite short-term volatility are the keys to achieving outperformance.