Choosing the Right Country ETFs

By Ron DeLegge, Editor

May 22, 2008

SAN DIEGO (ETFguide.com) - Do you know where the hot spots in the financial markets are? How about the cold spots?

More times than not, exchange-traded funds (ETFs) that follow stocks from a particular country will tell you the answer.

There are currently 51 ETFs that track stock markets of specific countries.

So far this year, equities from Brazil (Ticker: EWZ) are ahead by a sizzling 22.4 percent, Canada is (Ticker: EWC) up by 10.0 percent and Taiwan (Ticker: EWT) has jumped 9.4 percent.

Stock markets of underperforming countries include China (Ticker: GXC) which is off by 12.6 percent, South Korea (Ticker: EWY) is down 11.1 percent, and Malaysia (Ticker: EWM) has declined by 9.2 percent.

What can help you to choose the best country ETFs?

Here are a few things to keep in mind:

Country funds are often industry sector bets

With most single country ETFs, you aren’t just betting on a country’s equity market but also on a specific industry sector. For example, 57.80 percent of EWZ’s sector representation is to basic materials and energy. This fund will be acutely affected by any rise or fall in commodity prices.  

Country funds carry unique risks

Many countries don’t have large, deep and diverse stock markets like that of the U.S. and other developed nations. It’s common for single country ETFs to own just a handful of stocks and to be overweighted in just the largest of those companies. Another risk factor to consider is geo-political risks that can sometimes come into play. All of this may create unwanted volatility inside your portfolio.

Country funds are more expensive than broadly diversified international funds

According to ETFguide.com, the average annual expense ratio for country ETFs is 0.58 percent compared to just 0.47 percent for broad equity international funds. Can the higher ownership costs of country ETFs be overcome with better performance? There are no definitive answers.

Equally important is a clear understanding of the different investment approaches to equity exposure.

The iShares offered by Barclays Global Investors largely follow MSCI country indexes, which may attempt to represent a certain market, but not necessarily the same exact performance of a particular country’s leading benchmark. In contrast, Northern Trust recently launched a series of single country ETFs that follow established equity benchmarks in various countries.

Where do country ETFs fit into your investment plan?

After you’ve laid the foundation of your portfolio to a diversified mix of funds that cover the major asset classes, single country ETFs can be used as a handy tool.

For example, if you feel that Canadian stocks are the place to be over the next few years, you can overlay EWC onto your current portfolio positions. In other words, you can overweight countries you believe offer the best opportunities.

If you’re too timid to invest in single country ETFs a better approach for most investors is to just go with a broadly diversified international fund. Instead of trying to guess which areas are the best, you can leave the country picks up to someone else.

Top 5 Most Popular Articles:

Putting Oil in Your Stocks

One More Obstacle for Would-be Market Beaters

Turning Mutual Fund Losers into Winners

Niche ETFs Flood Market

Crazy April - Summary of New ETFs