Choosing the Right Country ETFs
By Ron DeLegge, Editor
May 22, 2008
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.
Stock markets of underperforming countries include
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
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.
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