Country ETFs for Nation Building

Sunday, May 30, 2010

Investors have long used country ETFs to try to outperform the global market. Nation-specific economic shocks make country ETFs compelling instruments.

Spooky numbers abound: 22% unemployment in Spain, 69 political violence deaths in Thailand, an 8.8 Richter-scale earthquake in Chile, and 15% yields on "junk" level Greek government bonds. Country performance is, not surprisingly, all over the map:

Asset classes correlate more today than in recent decades, but individual economies still present unique geographical, regulatory, and demographic profiles. Countries regularly suffer swings of investor sentiment, offering opportunity for the savvy investor. Typical plays plays for distressed countries are to short or leave them out of the portfolio or to buy them after they have collapsed. A mainstay strategy is simply to buy and hold countries with stronger-than-average growth prospects.

ETFs provide the ideal investment vehicle for targeting a country. Built around major equity indexes, country ETFs allow anyone from passive individual investors to hedge funds to overweight countries. They are sufficiently liquid to be useful for short-term trades in choppy markets and sufficiently low-fee to use for long-term passive exposure.

Country ETFs range from emerging markets which are risky but capable of huge surges, to fully developed economies which are unlikely to tank but also not likely to gain as much over time. Individual company holdings in emerging markets tend to be small companies, whereas in a major industrial power such as Germany company holdings will be mostly large cap.

Annual fees for country ETFs run from about .50% for developed countries to over .70% for emerging countries where inefficient brokerage procedures and government red tape add expense. Add to these annual fees the time and/or expense of picking countries, and you typically get a 1% extra hurdle required to beat an inexpensive passive international ETF.

In country investing, iShares' MSCI line dominates. It is relatively comprehensive and allows for clean multi-country allocation strategies. Each country index is customized to that nation, so index rules vary. In smaller countries, for instance, MSCI may cap the percentage of any one holding (Israel, Peru) so as not to allow any one company to dominate the index excessively. In addition, some countries have many firms with large amounts of common stock publicly traded technically but in practice locked up by insiders and government agencies. Attempting to mirror the full implied market cap means that large amounts of capital must chase after a small amount of available stock, driving up the price unreasonably. MSCI will typically institute an "investable market" rule in which only the portion of a company held by independant investors is counted towards the index.

MSCI's numerous ETFs for individual countries include:

  • iShares MSCI Australia ETF (NYSEArca:EWA), annual fees: 0.59%
  • iShares MSCI Austria ETF (NYSEArca:EWO), annual fees: 0.59%
  • iShares MSCI Belgium ETF (NYSEArca:EWK), annual fees: 0.54%
  • iShares MSCI Brazil ETF (NYSEArca:EWZ), annual fees: 0.74%
  • iShares MSCI Canada ETF (NYSEArca:EWC), annual fees: 0.54%
  • iShares MSCI Chile ETF (NYSEArca:ECH), annual fees: 0.74%
  • iShares MSCI France ETF (NYSEArca:EWQ), annual fees: 0.54%
  • iShares MSCI Germany ETF (NYSEArca:EWG), annual fees: 0.54%
  • iShares MSCI Hong Kong ETF (NYSEArca:EWH), annual fees: 0.54%
  • iShares MSCI Israel Capped Investable Market ETF (NYSEArca:EIS), annual fees: 0.68% (holdings capped at 24%)
  • iShares MSCI Italy ETF (NYSEArca:EWI), annual fees: 0.54%
  • iShares MSCI Japan ETF (NYSEArca:EWJ), annual fees: 0.54%
  • iShares MSCI Malaysia ETF (NYSEArca:EWM), annual fees: 0.54%
  • iShares MSCI Mexico ETF (NYSEArca:EWW), annual fees: 0.54%
  • iShares MSCI Netherlands ETF (NYSEArca:EWN), annual fees: 0.54%
  • iShares MSCI All Peru Capped Index Fund (NYSEArca:EPU), annual fees: 0.63%
  • iShares MSCI Singapore ETF (NYSEArca:EWS), annual fees: 0.54%
  • iShares MSCI South Africa ETF (NYSEArca:EZA), annual fees: 0.7%
  • iShares MSCI South Korea ETF (NYSEArca:EWY), annual fees: 0.7%
  • iShares MSCI Spain ETF (NYSEArca:EWP), annual fees: 0.54%
  • iShares MSCI Sweden ETF (NYSEArca:EWD), annual fees: 0.54%
  • iShares MSCI Switzerland ETF (NYSEArca:EWL), annual fees: 0.54%
  • iShares MSCI Taiwan ETF (NYSEArca:EWT), annual fees: 0.7%
  • iShares MSCI Thailand Investable Market ETF (NYSEArca:THD), annual fees: 0.68%
  • iShares MSCI Turkey Investable Market ETF (NYSEArca:TUR), annual fees: 0.68%
  • iShares MSCI United Kingdom ETF (NYSEArca:EWU), annual fees: 0.54%

A handful of other ETFs target major emerging economies:

  • PowerShares India Portfolio ETF (NYSEArca:PIN), annual fees: 0.78%
  • Van Eck Market Vectors Brazil Small-Cap ETF (NYSEArca:BRF), annual fees: 0.73%
  • Van Eck Market Vectors Indonesia ETF (NYSEArca:IDX), annual fees: 0.71%
  • Van Eck Market Vectors Russia ETF (NYSEArca:RSX), annual fees: 0.69%
  • WisdomTree India Earnings ETF (NYSEArca:EPI), annual fees: 0.88%

Co-founder of indexfunds.com, author of two books on investing, and founder of ETFzone.com, Will has been writing on indexing issues for 8 years. He holds an MBA from the University of Texas at Austin.