There are now over 200 single-country exchange traded funds trading in the U.S. with roughly $100 billion in combined assets under management.
But most of those ETFs are not pure trackers of a given country’s benchmark equity index. A few are. The Maxis Nikkei 225 Index Fund (NYSEArca: NKY), Horizons Korea KOSPI 200 ETF (NYSEArca: HKOR) and the Recon Capital DAX Germany ETF (NasdaqGM: DAX), the only U.S.-listed DAX-tracking ETF, come to mind.
Despite the dearth of ETFs that attempt to replicate foreign equity benchmarks, new research by Strategic International Securities (SIS), a New York-based registered investment advisor, indicates many of the single-country ETFs U.S. investors have access to do not skimp on correlations to the major stock benchmarks in those countries.
A great example is the iShares MSCI Italy Capped ETF (NYSEArca: EWI). As its name implies, EWI tracks an index from MSCI, but the lone U.S.-listed Italy ETF has an almost perfect correlation of 0.99 to Italy’s benchmark FTSE MIB Index, according SIS data. [Big Upside Seen for Italy ETF]
“If the euro continues to weaken the EWI will underperform the FTSE MIB up 21.8% in Q1 2015 because of the strong dollar. This is in contrast to the 8.8% increase in EWI for Q1 2015, which highlights the importance of hedging the currency with these ETFs,” according to SIS. [Reforms Could Lift Italy ETF]
The research firm highlights several other well-known single country ETFs as having stunningly intimate correlations to major equity benchmarks. That includes the iShares MSCI France ETF (NYSEArca: EWQ), which has a correlation to the CAC 40 of over 0.99. The iShares MSCI Germany ETF (NYSEArca: EWG), the largest Germany ETF and one of this year’s top asset-gathering ETFs, has a correlation to Germany’s DAX of over 0.92, according to SIS data.
“However, when one looks to Europe the major stock indices are not nearly as representative of the economy but are more reflective of the largest companies that domicile in that country. The German DAX index is a perfect example of this, in that almost all companies in that index are global in nature with some selling less than 10% of their products in Germany. Germany’s Export to GDP ratio, for example, is currently about 47%, and with the index driven largely by multinational companies it should not be a surprise that one of the key drivers of this index are German exports, and as a consequence the value of the Euro to it trading market basket of currencies is vitally important to this index’s overall performance,” said SIS President Phillip Miller in a recent research note. [Big Inflows to Germany ETFs]
The iShares MSCI Spain Capped ETF (NYSEArca: EWP) has a correlation of over 0.99 to the benchmark IBEX 35, according to SIS data.
ETF Correlations
Table Courtesy: Phil Miller, Strategic International Securities