Question: How do you invest in a country that you know has opportunity, but you’re not that familiar with? Or better yet, how can you get a piece of an industry in a particular country that you’re not familiar with, but that you know has a great investment theme behind it?
Answer: Via an exchange-traded fund (ETF), one of an increasing number of global ETFs that are so specific in nature they’re slicing the world into smaller and smaller bits. Thanks to burgeoning of the index-based global ETF industry, many of today’s country and sector specific ETFs are so narrow and so focused that they allow both advisors and investors to have an increasingly targeted and tactical approach to international investing. As such, these funds are able to tap into the very best opportunities that the global markets have to offer.
“Different countries and different regions develop at different speeds and oftentimes, a local story will have behind it a compelling investment theme,” says Adam Phillips, managing director at New York-based Van Eck Global, a pioneer in the ETF business.
ETFs, he says, allow investors to capture those many local stories and investment themes—investment themes that, in reality, investors should be making every effort to capture for the simple fact that they are the best opportunities out there.
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“Whether we like it or not, 55% of the global market capitalization is outside the United States,” says Tom Lydon, president of Global Trends Investments and editor of etftrends.com, an online service that provides commentary and perspective on the ETF industry. “As a country, we are very under-allocated overseas, but if [investors] are going to be properly diversified in their portfolios, advisors just have to understand the numbers and get past the idea that making money is not just about investing domestically.”
Whether people are new to international investing or whether they want to hone and fine-tune their existing exposure, there are a plethora of ETFs for investors and their financial advisors to choose from to capture just about every kind of global opportunity. From broad, regional ETFs, which give investors diversified exposure to popular investment areas like the Middle East and North Africa (MENA) region or the hot markets of Brazil, Russia, India and China (the BRICs), to single country funds holding large-cap stocks, the opportunities are boundless, Lydon says. There are ETFs that invest in mid-cap and small-cap equity and offer a great chance to play on domestic growth in individual countries. Others have been constructed specifically to take advantage of the opportunities in particular industry sectors like infrastructure, consumer and financials, or a particular economic theme, such as the high price of commodities.
Today, all manner of global ETF products are enjoying tremendous success. In fact, Vanguard’s MSCI Emerging Markets ETF (VWO) and iShares’ MSCI Emerging Markets (EEM)—two of the largest diversified emerging markets ETFs on the market—have been in hot battles for assets, Lydon says, while country-specific products like iShares’ Brazil ETF (EWZ) and its Korea (EWY) and Taiwan products continue to see record inflows.
According to research done by ETF Trends, iShares’ MSCI Peru ETF (EPU), its MSCI Thailand ETF (THD) and Global X/InterBolsa’s FTSE Colombia ETF (GXG) were the top performers among single-country ETFs in 2010.
Lydon expects the ETF asset class to become even more popular going forward and he expects both the interest in and production of country- and sector-specific ETFs will increase as advisors and investors become more conscious of global investment opportunities. In fact, he believes that international and emerging market ETFs will increasingly steal the thunder from mutual funds that invest in the same asset classes and become the investment of choice for many.
According to the 2011 Investor Brandscape report put out by Cambridge, Mass.-based firm Cogent Research, that dynamic is already happening and more investors are actually favoring ETFs over mutual funds.
Cost has much to do with it, says Cogent Principal John Meunier. ETFs are much cheaper than mutual funds (Vanguard’s VWO has an expense ratio of 0.27%, by way of example, while iShares’ EEM charges 0.69%), he says, and many advisors feel that their clients should invest in products that achieve market performance at a lower price point.
“Right or wrong, advisors seem to believe that most active managers don’t beat their indices,” Meunier says, “and they’d rather save their clients’ dollars for those actively managed funds that really are top performers in their [respective] asset classes. Competition is therefore very tight and there’s a far greater scrutiny going on of mutual funds.”
While many of the large fund families have taken on the ETF challenge and have made it clear they’re not going to go quietly into the night, it is nevertheless quite clear, Meunier says, that advisors are very concerned about cost, not least because a large chunk of their compensation is fee-based. “So it’s an important incentive for them to find good products at low prices.”
ETFs meet that requirement, but more importantly than their price point, the increased specificity and customization of global ETFs allow for a more skillful and tactical kind of portfolio management, one that enables advisors to simultaneously take advantage of the potential in some areas of the globe while avoiding the pitfalls in others.