Country ETFs

By Will McClatchy, ETFzone.com

Friday, July 3, 2009

The news is full of country-specific events, and increasingly investors are picking countries to outperform the global market instead of companies. ETFs are perfect for this endeavor.

The attraction of individual country investing is clear. Individual economies present unique geographical, regulatory environment and demographic profiles, so they are easy to analyse as distinct entities. At the same time, these economies are often overlooked and unfairly valued by random events. Just a look at various countries' activities suggests potential for inefficiency and outperformance:

Clearly different countries represent different risk profiles and should be compared on a risk-adjusted basis. Individual emerging markets like Thailand or Mexico can be expected to vary more widely around the emerging market average than a developed country like Germany will vary around a predominantly developed country index such as EAFE.

Investors who buy country ETFs range from individual traders to hedge funds to passive buy-and-holders on both the institutional and retail side. Some investors with deep knowledge of a country stick to it. Others systematically apply valuation models to all countries and rotate in and out of the best candidates. Country ETFs work well with many strategies because they are simple and self-contained.

A downside of country investing is that it can encourage myopia. For twenty years it has been shown that returns are determined by primarily by selection of asset classes (for better or worse), far more than selection of individual stocks. The same can now be said somewhat of country ETFs because in the past decade correlation between country equities has increased, making it harder to excel by picking country ETFs. This was made quite apparent in 2008 and 2009 when stocks gyrated wildly in unison. It was critical to be in or out of stocks at certain times, and still valuable but less critical to be in one country vs. another. Country investing is an excellent complement but not a replacement for careful and broad asset allocation.

Concentrating assets into country ETFs does not come free. The cost of a basket of country ETFs exceeds that of a broader international fund by about .20% for developed countries and about .50% for emerging countries. Then one must one add in the time and/or expense of picking or hiring someone to pick actual countries. So the question is: can an investor or their advisor pick a country better than the average by at least 1%? Beating the market by this amount is done consistently by sophisticated and/or lucky investors. By definition the average player cannot beat the average.

In country investing, iShares' MSCI line dominates. It is relatively comprehensive and allows for clean multi-country allocation strategies:

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.