THIS MONTH WE'VE

to submit it.

QUESTION: I am wondering what the best decision is regarding iShares MSCI Malaysia and iShares MSCI Canada. The returns on these two ETFs has been amazing. I do not want to sell nor want to be too greedy.
Jay Toskey Douglassville, Pa.

ANSWER: Every good investor must make some tough decisions about when to sell a position. Pulling the trigger is especially difficult after you've watched one of your bets take a dramatic leap in value. That's certainly been the case with emerging-market funds like the Malaysian one you bought. It is up 63% over the last year; the average emerging-market fund is up 55% during that same time period. As you said, nobody likes to leave the party early. But as billions of dollars chase those returns a good general rule to follow is that any time one of your investments rises or falls for that matter 15% to 20%, its time to re-evaluate your strategy: Do these funds still have room to run or is it time to take some profits off the table?

Emerging markets like Malaysia have been on the minds of other investors, as well. The last month we received queries about Vietnam and the United Arab Emirates, too. Sorry folks, while Lipper tracks 298 emerging-market funds worth a total of $204 billion, none of them focus on those two areas not yet, at least. We weren't even sure about Malaysia. But we have to admit we were pleasantly surprised by what we came across.

First of all, it's not often that you find an emerging-market-country ETF that has a decade-long track record. IShares launched its Malaysia offering back in 1996; most of its competitors have been around for less than three years. In addition, Malaysia's economy is expected to grow 5.6% this year and 5.8% next year, according to the World Bank, a pace around double that of the U.S. The agency adds that the country is enjoying low inflation, stable interest rates and expansionary fiscal policy. All those are good signs.

But let's pull back the curtain on your investment. This $1 billion concentrated fund it owns just 57 companies is really a bet on the country's financial institutions, since 32% of its holdings are in that sector. Financials generally have lower price/earnings ratios than the broader market, and it is in that context that you should consider the reasonable (at least by emerging-market standards) P/E of 18 displayed for the EWM on the iShares web site.

The fund's largest position is Bumiputra-Commerce Holdings, part of the second-largest bank in Malaysia with around $50 billion in assets. BCHB has benefited from a reorganization. The firm and its competitors have also done well because of top-down trends like higher household incomes, increased credit-card spending and an uptick in personal loans. Investors, though, have already gotten wind of those themes. Bumiputra has doubled in price this year. Other stocks in the fund have jumped just as much. While we read one analyst report that says BCHB is worth another 15%, it was difficult finding good information on other firms owned by the fund. In other words, it's hard to tell if these stocks are still considered a value. Remember, the iShares product is an index fund, not an actively managed offering. These stocks, regardless of how much they run up in value or fall back down, will stay in the fund until it's rebalanced.

And there are other concerns to grapple with. If you look at the fund's trading volume over the last year there have been many days when only a few hundred thousand shares changed hands. That could be a problem for two reasons: You may not be able to find a willing buyer if you decide to sell; or, if you do, it may not be at the price you want. Another consideration is that hot economy. Malaysia is a significant trading partner with the U.S., especially when it comes to electronics. So while you may think you're getting international exposure, the fortunes of some of the country's publicly-traded companies depend, in part, on how consumers here in the States are spending their cash. Even though Federal Reserve Chairman Ben Bernanke is trying to head off a recession with his last two interest rate cuts the latest quarter-point one was yesterday it looks like the U.S. economy is due for a slowdown. Finally, you always need to keep an eye on the political situation in emerging markets.

We wouldn't exactly call Canada an emerging market: The Toronto Stock Exchange was founded in 1861. But even though the iShares MSCI Canada fund invests in a developed economy closer to home, we still have some concerns. The fund owns double the number of stocks of its Malaysian counterpart, but it, too, has almost a third of its portfolio in financials. However, the Canada fund also has a 28% stake in energy. Canada's oil sands projects and the tax-favored income trust structure many are incorporated around have been a hotbed for aggressive investors playing the rise in commodities over the last few years. But when the Canadian government announced last year it would consider ending those tax advantages, the country's stock market dropped almost 3% in one day. Political concerns come in all stripes. And while investing outside the U.S. should hedge your exposure to the domestic market, the U.S. remains Canada's top trading partner and many of Canada's largest companies rely heavily on developments south of the border.

All that said, we think building small positions in emerging markets and by that we mean less than 5% of your total portfolio is a smart strategy for the long term. Granted, you need to understand the risks involved and do a lot of homework. But for now you should take a deep breath and pat yourself on the back for making a little money. You may want to protect your initial investment by taking some profits and waiting to buy back in on any dips.

And don't forget about the alternatives. Josh Itzoe, a principal with Greenspring Wealth Management in Towson, Md., agrees that every investor should have some overseas exposure. But he suggests a more diversified approach. "I still think it is more prudent to gain broad exposure across multiple emerging markets rather than go with specific countries," he says. "There's too much additional speculation involved with a country-specific approach, certainly from a political and economic risk standpoint." If he's swayed your opinion you could just move into the SPDR S&P Emerging Asia Pacific, which has a 7.4% holding in Malaysia, or the iShares Emerging Markets ETF. The iShares fund owns stocks in countries like China, Russia, Brazil, Mexico, India and Malaysia. Vanguard also has a popular emerging-markets fund.

QUESTION: I've never owned an ETF, but I am anything but a newbie to the market. (I am 66 now.) How about a suggestion for an ETF, or ETFs, that accomplish the following: S&P 500 returns; virtually risk-free income producer; and downside protection. I am seeking investment suggestions, not a suggestion to see a wealth management advisor.
Bill Mathis, Clayton, Mo.

ANSWER: Well, wealth managers are exactly the crowd we went to first with your question, And, honestly, they were a bit stumped. The concept wasn't alien to them. However, pulling off such a strategy with a single ETF was a difficult task.

The stumbling point was combining income with low risk. If you mention income to an advisor you will usually have a conversation about dividends and yield. Currently, the S&P 500 has a dividend yield of about 1.8%. As you start climbing into yields above that mark you take on more incremental risk. Dividends can be a great way to hedge inflation, especially for someone who is close to retirement. But if you went on yield alone and jumped into stocks kicking off 7% or 8% or 10%, you might put your portfolio in jeopardy. "Any additional yield means you are taking on more risk," says Matt McCall, founder of Penn Financial Group and editor of the ETF Bulletin.

That said, there are many dividend-focused ETFs. The entire Wisdom Tree family is based on dividend investing. In addition, PowerShares has two dividend funds, Dividend Achievers and High Yield Equity Dividend Achievers. The first one invests in a broad array of dividend payers and has a yield of 2.5%; the second favors the top 50 of that same group and has a yield of 4.7%, according to Morningstar. As of late, the performance of these funds hasn't been great. John Schloegel, a vice president with Capital Cities Asset Management in Austin, Texas, cites two reasons. First, most dividend-paying companies also happen to be financial-services firms and these have gotten clobbered by the mortgage and credit crunches. Second, investors anticipating a slowdown here in the U.S. moved into these stocks several years ago, bidding up their prices.

Schloegel toyed with the notion of some exchange-traded notes and a preferred stock ETF. However, he dismissed these ideas because the trading volume was too low or the underlying strategy hadn't been road tested.

That last point is important. There are plenty of new products coming on the market geared toward senior citizens, and most have yet to experience all the market can throw at them. One option you may want to keep an eye on is in the traditional mutual-fund world. In October, Fidelity launched a series of 11 "income replacement funds," which combine active management with a unique withdrawal program. You invest a certain amount of money and pick a date that ranges from 2016 to 2036. The fund kicks off varying amounts of cash every year depending on how far away the date is and how much money the fund has returned. Ultimately, the entire position will be distributed to you by the end date. However, you may want to just fall back on a good old-fashioned balanced fund. It may not hit a homer when the market is taking off, but a low-fee offering will give you decent returns, some income and downside protection.