RSSGoing Global With ETFs Shouldn't Be Scary
By Tom Lydon | July 07, 2008 | 5:48 PM | 1 Comment
Two thirds of the world's market capitalization resides outside the United States, which means that there's a whole universe of opportunities for exchange traded fund (ETF) investors out there.
Naturally, investing in some areas of the world can be riskier than others. But by ignoring it completely and staying on your home turf, you are also missing out on opportunities to capture some of the rapid growth that has been taking place in emerging markets and now, frontier markets.
Single-country focused exchange traded funds (ETFs) are well-recognized for their investment benefits and instant diversification. They are one of the most simple ways to gain foreign stock exposure across a range of sectors, with less volatility and expense than single stocks.
As with mos ETFs, the benefits of single-country funds lies in their instant diversification. They can help an investor avoid the pitfalls and struggles of trying to do research on a relatively unknown company and then picking a foreign stock to buy.
For a long time, iShares was one of the only providers of single-country ETFs, but lately we’ve seen the options expanding. The iShares line has 29 such funds, and this year has seen the launch of a number of single-country funds from Northern Trust, as well, and some of those cover new territories.
Among the offerings are:
- NETS ISEQ 20 Index Fund (NYSE: IQE): Covers Ireland; launched June 16
- NETS PSI 20 Index Fund (NYSE: LIS): Covers Portugal; launched May 21
- iShares MSCI Israel Capped Investable Market Index Fund (NYSE: EIS): up 5.1% since March 31 inception
- iShares MSCI Malaysia Index Fund (AMEX: EWM): down 21.4% year-to-date
- Market Vectors Russia (AMEX: RSX): up 0.5% year-to-date
- iShares MSCI Brazil (AMEX: EWZ): up 1.4% year-to-date
- iShares MSCI Canada (AMEX: EWC): down 0.9% year-to-date
When considering single-country funds, be sure to look at the holdings and sector/company weightings. If you’re already invested in energy, then you might not be interested in Russia’s ETF, because it’s 42.6% weighted in the sector. Malaysia’s ETF is 30.9% weighted in financial services, and if you’re skittish about the industry, it may not be the fund for you.
As emerging markets become more closely correlated with developed markets, investors are looking around for the next thing: frontier markets.
Claymore BNY/Mellon Frontier Markets ETF (FRN), the first fund of its kind. It’s made up of American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs).
Claymore President Christian Magoon told us that he feels this
untapped area of the world has a lot to give. "They offer a lot of
return and risk potential, and there’s a low correlation to developed
and emerging markets."
One issue with emerging markets, he points out, is that as they
emerge, they tend to correlate more and more closely with developed
economies - that’s not always necessarily a great thing.
The Bank of New York Mellon came up with five criteria for what
constitutes a "frontier market," and 41 countries could be classified
as such. From that, 15 countries on four continents met the criteria
for inclusion in the actual index, which were a minimum share price of
$3, market capitalization of $100 million and trading volume of 10,000
shares a day.
The top countries represented in the fund will be Poland, Chile,
Egypt, Kazakhstan, Peru and the Czech Republic. It rebalances
quarterly, and Magoon says that new stocks may be added to the fund as
they become eligible. For example, Vietnam doesn’t have any stock that
meets the criteria, but when it does, it could be added.
Different index providers have varying criteria on what a "frontier
market" is, Magoon says. For example, based on their definition,
Goldman-Sachs defines 11 countries as frontier markets. Standard &
Poor’s defines 37, and Merrill Lynch defines 17. Of the Bank of New
York/Mellon index, "We believe it’s the broadest frontier market in the
world."
The index allows for a range of frontier markets, some in the early
stages of frontier, while others are closer to the "emerging" side of
things.
Also anticipated is the PowerShares MENA Frontier Countries Portfolio (PMNA). Around 50 companies will be part of the underlying index and a majority of the assets will be in Nigeria, Egypt, Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and United Arab Emirates.
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