The Wall Street Journal-20080112-Smart Play or an Unwise Bet-- Country-Specific ETFs Promise Big- but Risky- Payout
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Smart Play or an Unwise Bet?; Country-Specific ETFs Promise Big, but Risky, Payout
Two years ago, Tom Lydon, president of Global Trends Investments in Newport Beach, Calif., made a small bet on the iShares Austria exchange-traded fund. Most of the names in the portfolio were hard to pronounce, let alone spell. But he liked the ETF because it not only gave him exposure to Austria, but also to emerging markets in the area. In 2006, he sold it for a 28% gain.
"This ETF was a great way to take advantage of the growth in Eastern Europe," said Mr. Lydon, who also is the editor of ETF Trends, an industry newsletter.
The popularity of international investing has been well-documented. But the rising interest in country-specific exchange-traded funds is lesser known. In small doses, country-specific ETFs can be a smart move for aggressive investors, though they carry considerable risks.
There is an ETF for almost every country in Europe, Asia and Latin America. New funds have focused on areas like the Middle East and Africa. Besides Barclays PLC's iShares -- the dominant company, with 24 country-specific ETFs -- others include State Street Corp.'s State Street Global Advisors unit, Invesco Ltd.'s PowerShares Capital Management unit and WisdomTree Investments Inc. Morningstar tracks 36 single-country ETFs, which hold $57 billion, or about 10% of the industry's assets.
Increasingly, financial advisers are using these ETFs as a substitute for individual stocks or as a supplement to a generic broad-focused ETF in order to increase returns. Some are building highly customized versions of international indexes.
"These ETFs allow you to take advantage of trends that are going on around the world," said Marc Henn, a senior vice president with Haberer Registered Investment Advisor Inc. in Cincinnati.
While single-country ETFs hold the promise of big returns, they aren't well-suited for most investors, who may be better off with a low-cost, actively managed international mutual fund. Many country- specific ETFs are thinly traded and attract a small asset base. That means getting in and out of them quickly -- a selling point of ETFs, which trade like stocks throughout the day -- isn't a guarantee. They also tend to be top heavy in a few stocks or industries.
Indeed, iShares Switzerland has 25% of its assets in financial companies, while iShares Spain has a 22% position in phone company Telefonica SA, and its top 10 holdings account for almost 80% of its assets. If any one of those stocks takes a nose dive, the fund will follow. Another concern: transparency. Finding research reports or regulatory filings on certain foreign companies can be difficult. And there always are geopolitical issues with which to contend.
Yet as some of these funds chalk up big returns, especially ones focused on China, the money has followed, increasing trading volume. SPDR S&P China, for example, averages volume of 190,000 shares a day. It has attracted almost $200 million since being launched last March. Transparency also has improved, with some companies adopting U.S. accounting methods and filing quarterly and annual financial reports.
Some advisers use single-country ETFs as a way to boost the returns of portfolios filled with generic index products. The most popular international index, the MSCI EAFE, which covers some two dozen countries, from Japan and the United Kingdom to Greece and Portugal, returned 11% in 2007.
But China funds returned 51% and Latin America funds rose 46% over the same period, according to Lipper. If their clients can stand the additional risk, advisers will build small positions, between 2% and 5%, in these ETFs.
