Worldly investors, meet the raciest way yet to global exposure to your portfolio.
Forget gold, oil, metals, technology and all the other stuff you think of when it comes to top-performing sector investments. Exchange-traded funds that focus on the stock markets of individual countries are way hotter.
The iShares FTSE/Xinhua China 25 Index Fund was up 68.5 per cent for the year through Dec. 20, while iShares MSCI Spain and Mexico funds made 48 and 38.5 per cent, respectively. The Mexico ETF's three-year cumulative gain is 197.7 per cent, which compares with the 175.6 per cent returned by the second-place MSCI Brazil Index Fund.
There are more than 20 single-country ETFs listed on the New York and American stock exchanges and they're easily accessible through any discount or full-service broker. Amazingly profitable and hellaciously risky -- that's single-country ETFs. You probably shouldn't touch them in your portfolio unless, well, let's just say you need to be savvy enough to recognize the nitroglycerin-like qualities of these investments.
Single-country ETFs track national stock indexes as constructed by Morgan Stanley Capital International, a leader in constructing global indexes. Just to give you a flavour of how these indexes work, the top holdings of MSCI's Canadian index include Royal Bank of Canada, Manulife Financial Corp., EnCana Corp., Barrick Gold Corp. and Canadian National Railway Co.
Investors have made piles of money in single-country ETFs over the past five years, but some experts don't like them a bit.
"I'm just not a fan of the single-country ETFs, pretty much across the board," said Sonya Morris, an analyst with the investment research firm Morningstar Inc. in Chicago. "I think most long-term investors can do without them."
One problem that Ms. Morris has is the difficulty of examining the economic and political factors at work in individual countries and trying to use this data to pick winning funds on a consistent basis. She also warned about how dangerously concentrated the individual stock holdings can be in some of these ETFs.
Consider the iShares MSCI Belgium Index Fund, which has risen about 33 per cent this year. Ms. Morris said the top three holdings in the fund account for almost 50 per cent of its assets, and that each of the three stocks is in banking or insurance. The iShares MSCI Singapore Index Fund has close to half of its assets in its top four stocks, three of which are financials.
ETFs with highly concentrated holdings can be volatile, or in other words prone to big swings. We've seen that on the upside in recent years, but single-country ETFs can fall hard as well. While the iShares MSCI Mexico Fund is up solidly this year, it plunged 28 per cent in the late spring amid a broad pullback in the stock markets of emerging economies.
Asian single-country ETFs have been ferociously volatile in the past, notably during the difficulties those economies experienced in the late 1990s. The aforementioned Singapore ETF fell about 75 per cent from February, 1997, to September, 1998 -- from $12.50 (U.S.) to $3.50. The fund then rallied back to $9 before plunging anew at the start of this decade to the $3.80 range. Just this week, investors were reminded of this volatility in Asian markets when the Thai stock market plunged 15 per cent Tuesday and then quickly made back much of this loss the next day.
The appeal of exchange-traded funds as an investment class is that they allow individuals to buy the returns of dozens of different single-country, regional and international stock indexes in a single package that costs much less to own than traditional mutual funds. ETFs focusing on individual European and Asian countries are among the most expensive in the ETF universe, however.
