Another type of risk in some country funds is when one stock has a disproportionately large weighting in a fund. For example the Danish market has a massive in a drug company specializing in diabetes. An investor drawing a favorable conclusion on Denmark would want to take the time to learn about that company. It would not make sense to buy a fund tracking Denmark while having a bearish opinion on the stock dominating the index.
Similarly, after owning Denmark for some period of time the fundamental picture for that drug company could change for the worse which could make the fund better to sell at that point even if the top down story for the country is better than ever.
Not all country indexes have concentration issues like this of course. France has no sectors greater than 20% and although a couple of stocks in the fund come close to 10% weightings the fund is not beholden to those names the way certain less diversified funds are.
Foreign investing with country funds was a huge driver of returns in the previous decade but less so in the 1990’s. Now after a run where foreign has mostly lagged domestic it is logical to expect the pendulum to swing back the other way and when that occurs country funds will again drive returns.
Investors can do this themselves or seek out a managed solution but either way the space should not be ignored.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.