Exchange traded funds (ETFs) that track a single country have have been a boon to many long-term investors. They allow investors to reduce their exposure to specific regional disruptions, such as the recent credit crunch, and they up the exposure available to countries that are profiting more than the United States or other distressed nations.
Global growth has been outpacing that of the United States’ for some time now. Evidence of this can be seen just by looking at the performance of the S&P 500: year-to-date, it’s down 5%. Its five-year average return is 10.6%, and the ten-year average is 3.9%.
Investors can’t be blamed for considering looking abroad for places to put their money. Single-country funds offer more flexibility than mainstream equities, says Alan Farley for The Street.
Overnight gaps that can occur in single-country ETFs can subject them to volatility.
iShares MSCI Mexico (EWW) is an example, as it fell nearly 3% on April 25 because of weak earnings from America Movil (AMX). However, over the past decade, EWW has benefited from Mexico’s steady growth in the last decade. Year-to-date, the fund is up 3.6%.
Other ETFs with a strong year-to-date performance include iShares MSCI Brazil (EWZ), which is up 12% and has an annualized return of 55.4% over the last five years; iShares MSCI Taiwan Index (EWT), up 10.2% so far this year, with an annualized return of 18.6% over the last five years.
Brazil was upgraded yesterday by Standard & Poor’s to "investment grade."
These uptrends over time with single-country ETFs are all well and good (hindsight is 20/20, right?), but what if you had bought Brazil in November and sold it in January? You would have been down 50%.
But each single country needs to be evaluated on its own merits. Not all of them are going to go up. When it comes to these funds, educate yourself and monitor the trends closely. Have your sell points set for each, letting it go when it either drops below its 200-day moving average or 8% off its high.
If you stick to the plan, hopefully you will achieve your goal of doing well on the uptrends while avoiding the volatility that occurs from time to time.
