The annual rebalancing of the Russell/Nomura Japanese stock indexes just concluded, resulting in more than 30% turnover rates for each series in the benchmarking family.

The Russell/Nomura Total Value Index had 212 deletions and 176 additions, while the Russell/Nomura Total Growth Index had 270 deletions and 136 additions.

There are Japanese stock exchange-traded funds from Barclays Global Investors' iShares family, Northern Trust's NETS and from WisdomTree Investments.

JPP and JSC are relatively small ETFs in terms of assets. JSC had close to $73 million in assets through last month while JPP had only $13.5 million.

Among all single-country international ETFs this year, those focused on Japan have held up relatively well in terms of performance. JPP was down 32.15% heading into Monday, while JSC had dropped 23.99% so far in 2008, according to Morningstar data.

That may not seem like impressive performance on the surface, but consider that the broad-based iShares MSCI EAFE Index (NYSE: EFA) for developed international markets has slid more than 45% this year.

The Russell/Nomura Prime Index, which is JPP's index, measures the performance of Japan's top 1,000 float-adjusted stocks. This year, 26 companies came into the Prime Index for the first time and its total market capitalization decreased from 201 trillion yen to 200 trillion yen (as of Oct. 15).

The turnover ratio of the index was 1.6%, which is relatively low compared to previous years, the companies said in a statement.

The number of stocks in the Russell/Nomura Small Cap Index, JSC's underlying index, dropped by 76 companies to 1,100. The small-cap index represents the top 85% and bottom 15% of the Russell/Nomura Japan Equity Index, on a market capitalization basis.

The decrease in JSC's index reflected the larger decline in the capitalization of small-cap companies relative to the overall market decrease.

People talk a lot about the interaction between the political economy of nation states and the performance of their markets. And it is certainly true that different countries are often at different points in the economic cycle. That's one of the reasons why diversifying overseas adds low-correlated returns to a portfolio.

But there's another reason for those differences: sectors. The sector breakdowns between regions and countries differ widely, and examining those breakdowns can help you understand why one market zigs while another market zags.

Of course, the tail wags the dog here: The sector breakdown is reflective of each region's economy, and vice versa. But sectors offer one easy way to gain insight into how and why one economy and market performs differently from another.

U.S. Vs. The Developed World

If you compare the U.S. with international developed markets, for instance, you see stark differences in the sector front. The table below compares the sector breakdowns as of 10/07/08 for the S&P 500 SPDR ETF (AMEX: SPY) and the SPDR S&P World ex-US ETF (AMEX: GWL). It is ranked based on how overweight the developed international markets are vs. the S&P 500.

Interesting, huh? Financials make up more than one-quarter of the developed international markets, compared with less than 15% here at home. Materials are also significantly overweighted abroad. Meanwhile, U.S. markets are more heavily weighted to Information Technology, Consumer Staples, Health Care and Energy.

It doesn't take much to see why those two markets may diverge over the coming weeks and months.

It doesn't take much to see why those two markets may diverge over the coming weeks and months.

U.S. vs. Europe

If we drill down inside developed markets, we find that there is a large difference between the two poles of that market: Europe and Japan.

If you compare SPY with the iShares S&P Europe 350 Index Fund (NYSEArca: IEV), you get an interesting contrast. The biggest difference between this and the developed markets comparison lies in Information Technology. Based on this ETF, Europe has virtually no allocation to Information Technology.

Things change fairly radically when you turn to Japan. For this, I used the SPDR Russell/NOMURA PRIME Japan ETF (AMEX: JPP). In Japan, the overweight allocation to Financials falls, but the allocations to Consumer Discretionary and Industrial stocks skyrocket. On the flip side, the market is heavily underweight Energy, Health Care and Consumer Staples.

U.S. Vs. Emerging Markets

Things get even more interesting when you turn to the emerging markets. The following table compares SPY to the SPDR S&P Emerging Markets ETF (AMEX: GMM), and shows that much of the diversification benefit from emerging markets stems plainly from the sector breakdown of their exposure.

Emerging Markets have a huge overweight to Telecom, Materials, Financials and Energy, and major underweights to Healthcare, Consumer Staples and Information Technology.

Wonder why emerging markets are volatile?

Drilling deeper, what if we looked at individual regions within emerging markets. I've heard a lot of advisors recently talk about the relative attractiveness of the Latin American market, so I thought I'd compare SPY to the SPDR S&P Emerging Latin America ETF (AMEX: GML).

The results are even more pronounced: major overweights to Materials and Telecoms, and major underweights to Health Care and Information Technology.

I've written before that there is no one real "BRIC" market. The available BRIC ETFs differ widely, with differing weights to Brazil, Russia, India and China. But just to get a flavor of how sectors impact the performance of the BRICs, I compared SPY and the SPDR S&P BRIC 40 ETF (AMEX: BIK). The sector weights vs. the S&P 500 are overwhelming. I'll let the table speak for itself.

After I wrote my last blog comparing sectors vs. style in the U.S., Jim Wiandt asked me what investors are supposed to "do" with this information. To me, it's obvious: Understand that these sector differences are out there and incorporate them into your decision making. A fund like BIK that includes a 38% weight to Energy is going to perform differently than an S&P 500 fund that weights Energy at 13%, regardless of what country we're talking about.

Sectors matter. This is one way to start to incorporate that into your market analysis.

People talk a lot about the interaction between the political economy of nation states and the performance of their markets. And it is certainly true that different countries are often at different points in the economic cycle. That's one of the reasons why diversifying overseas adds low-correlated returns to a portfolio.

But there's another reason for those differences: sectors. The sector breakdowns between regions and countries differ widely, and examining those breakdowns can help you understand why one market zigs while another market zags.

Of course, the tail wags the dog here: The sector breakdown is reflective of each region's economy, and vice versa. But sectors offer one easy way to gain insight into how and why one economy and market performs differently from another.

U.S. Vs. The Developed World

If you compare the U.S. with international developed markets, for instance, you see stark differences in the sector front. The table below compares the sector breakdowns as of 10/07/08 for the S&P 500 SPDR ETF (AMEX: SPY) and the SPDR S&P World ex-US ETF (AMEX: GWL). It is ranked based on how overweight the developed international markets are vs. the S&P 500.

Interesting, huh? Financials make up more than one-quarter of the developed international markets, compared with less than 15% here at home. Materials are also significantly overweighted abroad. Meanwhile, U.S. markets are more heavily weighted to Information Technology, Consumer Staples, Health Care and Energy.

It doesn't take much to see why those two markets may diverge over the coming weeks and months.

It doesn't take much to see why those two markets may diverge over the coming weeks and months.

U.S. vs. Europe

If we drill down inside developed markets, we find that there is a large difference between the two poles of that market: Europe and Japan.

If you compare SPY with the iShares S&P Europe 350 Index Fund (NYSEArca: IEV), you get an interesting contrast. The biggest difference between this and the developed markets comparison lies in Information Technology. Based on this ETF, Europe has virtually no allocation to Information Technology.

Things change fairly radically when you turn to Japan. For this, I used the SPDR Russell/NOMURA PRIME Japan ETF (AMEX: JPP). In Japan, the overweight allocation to Financials falls, but the allocations to Consumer Discretionary and Industrial stocks skyrocket. On the flip side, the market is heavily underweight Energy, Health Care and Consumer Staples.

U.S. Vs. Emerging Markets

Things get even more interesting when you turn to the emerging markets. The following table compares SPY to the SPDR S&P Emerging Markets ETF (AMEX: GMM), and shows that much of the diversification benefit from emerging markets stems plainly from the sector breakdown of their exposure.

Emerging Markets have a huge overweight to Telecom, Materials, Financials and Energy, and major underweights to Healthcare, Consumer Staples and Information Technology.

Wonder why emerging markets are volatile?

Drilling deeper, what if we looked at individual regions within emerging markets. I've heard a lot of advisors recently talk about the relative attractiveness of the Latin American market, so I thought I'd compare SPY to the SPDR S&P Emerging Latin America ETF (AMEX: GML).

The results are even more pronounced: major overweights to Materials and Telecoms, and major underweights to Health Care and Information Technology.

I've written before that there is no one real "BRIC" market. The available BRIC ETFs differ widely, with differing weights to Brazil, Russia, India and China. But just to get a flavor of how sectors impact the performance of the BRICs, I compared SPY and the SPDR S&P BRIC 40 ETF (AMEX: BIK). The sector weights vs. the S&P 500 are overwhelming. I'll let the table speak for itself.

After I wrote my last blog comparing sectors vs. style in the U.S., Jim Wiandt asked me what investors are supposed to "do" with this information. To me, it's obvious: Understand that these sector differences are out there and incorporate them into your decision making. A fund like BIK that includes a 38% weight to Energy is going to perform differently than an S&P 500 fund that weights Energy at 13%, regardless of what country we're talking about.

Sectors matter. This is one way to start to incorporate that into your market analysis.