Investors have long used country ETFs to try to outperform the global market. If turmoil offers opportunity in this asset class, then opportunity clearly abounds.
A year ago we saw Spanish unemployment, chaos in Thailand and an earthquake/tsunami in Chile. That backdrop now seems quaint. Spanish unemployment has climbed higher still, chaos reigns in multiple oil-producing countries far more crucial than Thailand, and a momentous earthquake jarred Japan's mighty auto plants.
ETFs provide the ideal investment vehicle for targeting a country. Built around major equity indexes, country ETFs are sufficiently liquid to be useful for short-term trades in choppy markets and sufficiently low-fee to use for long-term passive exposure. Asset allocation rules of thumb are that emerging market ETFs are riskier, more growth oriented and smaller cap than major industrial markets.
Country ETF performance over the past year was, as always, all over the proverbial map. This time exporters and commodities rich countries led the way:
Germany (EWG) surprised many and roared ahead on solid manufacturing exports in the midst of European sluggishness, and despite bailing out Greece. Less surprising was South Korea (EWY) which hummed along as an exporter to the US and partner to China. South Africa (EZA) benefited from gold and other metal spikes, as did Australia (EWA). The surprise laggard was Brazil which nevertheless showed solid growth in manufacturing and broad development of natural resources. Chile's (EWC) ability to export fresh produce and mine metals far outshone earthquake damage. Japan (EWJ) has been harder hit by its tsunami due to supply chain disruption and electrical blackouts from the Fukushima nuclear facility.
Prudence suggests that Germany has had its day in the sun, and that commodity-driven economies will soon hit a wall of resistance where consumers can pay no more for commodities. Brazil may be the exception, where strong fundamentals have not been reflected in stock returns. Japan was already cheap before the tsunami and is surely oversold. Taiwan is an overlooked play in global export growth.
Despite recent remarkable events, economists say country stock markets correlate more today than in past decades. A mainstay strategy is simply to buy and hold countries with stronger-than-average growth prospects, especially when they have been hit hard or have lagged their peers.
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. This is a bargain next to stock-picking mutual funds which charge at least 1% more.
In country investing, iShares' MSCI line dominates. It is relatively comprehensive and allows for clean multi-country allocation. Index rules vary such as in smaller countries where MSCI may cap the percentage of any one holding (Israel, Peru) so as not to allow any one company to dominate an index. Some countries have large amounts of common stock locked up by insiders and government agencies. Capital must chase after a small amount of available stock to match an index, driving up the price unreasonably. MSCI will typically institute an "investable market" rule in which only the portion of a company held by independent investors is counted towards the index.
MSCI's numerous ETFs for individual countries include:
A handful of other ETFs target major emerging economies: