The rally in foreign and emerging market stocks during the first half of 2009 has awakened within U.S. investors an apparently long slumbering desire to invest in countries such as Colombia and Malaysia. Barclay’s iShares, the world’s largest ETF sponsor, spent the first six months of 2009 racing against newcomer Global X Management to list the first ETF tracking stocks from Peru. (Barclays won the race in June, when shares of its MSCI All Peru Capped Index Fund (EPU) started trading.)
There are about 40 “country-specific” ETFs which track local stock market indexes at relatively low cost, listed in the U.S. There are no less than 10 ETFs that track Japanese stocks–from broad-based funds such as the iShares MSCI Japan Index fund (EWJ) to specialized funds like the WisdomTree Japan SmallCap Dividend Fund (DFJ)–and six focused on China, including funds targeting Chinese small cap stocks and the real estate sector (FXI, EWH, GXC, PGJ, HAO, FCHI). Just one country specific fund–iShares MSCI Switzerland Index Fund (EWL)-has Standard & Poor’s top “Overweight” ranking, which is based on a blend of performance, risk, and cost factors.
For those that prefer a focused, rather than scattershot, approach single-country funds offer an attractive proposition. For roughly the same cost as investing in a U.S. sector ETF, investors can gain exposure to markets from Belgium (EWK) to Brazil (EWZ) through a security that trades on a U.S. exchange during regular business hours. And while many foreign companies are listed in the United States as American Depository Receipts and Shares, country-specific funds give exposure to smaller, lesser known companies that are too small for a U.S. listing.
The downside to country-specific funds is that, like the economies they are based on, many are heavily weighted to a particular economic sector. Global X’s first fund, the InterBolsa FTSE Colombia 20 ETF (GXG), has almost half of its assets in banks or financial services. The iShares MSCI Mexico Investable Market Index Fund (EWW) is 38% invested in telecommunications.