Forget BRIC: Your Portfolio Needs TICK

Much has been made of the growth of the BRIC countries of Brazil, Russia, India, and China. But the fact remains that despite their impressive growth rates, all of these countries remain very poor relative to the developed world. For example, in the People’s Republic of China, more than one third of the population lives on less than $2 a day. In Brazil the figure stands at 18%, and an incredible 75% in India (PDF). These depressing figures indicate that the BRICs have a long way to go to reach developed status. While there are certainly great opportunities in the BRICs, there are also substantial risks.

Some degree of BRIC exposure should probably be included in almost every investor’s portfolio (see our complete guide to BRIC ETFs for a closer look), but many investors might be better suited tilting their international exposure to the “TICK” bloc of Taiwan, Israel, Chile, and Korea. These economies may be small, but they all pack an economic punch. All four are ranked between 25-50 on the Human Development Index (note Taiwan is not recognized by the UN but would rank 25th according to its statistics), and all have above world average GDP per capita (PPP).

These borderline developed markets present a compelling economic story – having proven they can grow but still with significant room for expansion into truly developed world. While most of the TICK (with the exception of Chile) can be considered “developed” by certain sources, these recognitions are not universal, suggesting that there is still some debate about the level of development in these countries.

TICK vs. BRIC

As indicated in the chart below, the TICK bloc is nearly three times as rich, twice as highly-ranked on a leading competitive index ranking, and has a higher life expectancy and lower inflation and unemployment rates. While it is true that BRIC is growing twice as fast, the BRIC will need to grow at a 7% rate for roughly 16 years just to catch up to the TICK’s development level, assuming that the TICKs do not grow at all in that time period.

Another positive for the TICK: it is a bloc of purely democratic nations which will generally translate into reduced political and business risk relative to most emerging markets. Also, the small size of the TICK bloc may mean that it will be easier to raise living standards. Unlike the BRIC, which is composed of four of the 10 most populated countries in the world, the TICK combines to have a population less than half of the United States. This makes governing much more manageable and reform much easier to implement.

The TICK can currently be accessed by 4 different country specific ETFs, all from iShares.

iShares MSCI Taiwan Index Fund (EWT)

Taiwan, one of the four Asian tigers, has proven it is capable of remarkable growth despite its isolation. While it is not recognized by the United Nations due to a lobby from the People’s Republic of China, this sanction hasn’t stopped Taiwan from seeking better ties with the mainland. Taiwan hopes to become the main jumping off point for companies that are looking to invest in mainland China but are still worried about massive state intervention and other communist party tactics that are prevalent in the PRC.

Taiwan plays a very important role in the technological world: it is a global leader in semiconductors, smart phones and is stepping up its biotechnology programs. Should consumer product sales see an uptick, Taiwan would be a main beneficiary, especially if consumer demand picks up on the mainland. Taiwan has also been very conservative fiscally, allowing it to escape the worst of the Asian financial crisis and has built up sizable foreign exchange and gold reserves. Currently its reserves stand at over $12,000 per capita, which will provide a nice cushion should any other financial crises hit the Republic of China.

EWT is heavily weighted towards information technology, with nearly 60% of the fund in the sector and almost 15% of the overall assets in Taiwan Semiconductor. The fund has a 0.73% expense ratio and has holdings in 125 Taiwanese stocks.

(For a recent look at the Taiwan ETF click here)

iShares MSCI Israel Capped Investable Market Index Fund (EIS)

Since Israel lacks the reserves of natural resources of its neighbors, the country has had to rely on innovation and technology to drive most of its growth. Israel is seeking to become a solar power leader in the region, which could lessen dependence on the actions of occasionally hostile neighbors. Israel has one of the highest rates of solar water heater usage, with almost 90% of the population heating their water this way (PDF). Israel also has “Silicon Wadi” or their version of Silicon Valley, which has become a high tech hub in the Middle East attracting companies such as IBM, Google, and Intel. Silicon Wadi has been described as the second most important center of innovation in the world, and with good reason. It has produced impressive technological feats such as Intel’s Centrino chip and the programing code PHP. Israel also has a very well educated workforce that are trained in technical skills, with a high level of engineers at 135 per 10,000 employees (well above America’s 70 per 10,000).

EIS is a well diversified fund, with five sectors comprising at least 10% of holdings. Financials and healthcare make up the two largest sectors at about 24% and 23%, respectively. EIS has an expense ratio of 0.63%, and pays out a dividend of just over 2%.

iShares MSCI Chile Index Fund (ECH)

The least developed of the four countries, Chile finds itself in a very unique position at the start of the 21st century. Its dependence on copper is still very high, but that isn’t necessarily a bad thing given the crucial role of the metal in the modern economy and its current price at just under $3 per pound.

Chile also uses a sovereign wealth fund in order to invest copper proceeds when prices are high and then spend this money in the economy when prices of the metal are low, ensuring a steady stream of income without significant deficit spending. Chile is seeking to diversify its economy out of minerals, and as such has very liberal foreign investment rules. Over the past five years, foreign direct investment inflows have quadrupled to some $17 billion in 2008. This has led to growth in the financial sector especially, as well as more manufacturing activities since Chile has also signed numerous free trade agreements throughout the world. Chile has come a long way since its military dictatorship under Pinochet, and the country is now tied for 21st best in a recent study of government corruption (with Japan no less). Chile maintains by far the highest ranking for a South American country (Brazil is in 62nd place), indicating that this mountanous nation may merit consideration from global investors.

ECH is weighted heavily towards the basic industries with nearly 40% in basic materials and industrial stocks. The fund also has a significant weighting in utilities, which comprise almost 30% of the 33 stock portfolio.

Korea- iShares MSCI South Korea Index Fund (EWY)

South Korea is strategically located between the economic juggernauts of China and Japan. The country has a diversified economy, but its focus is clearly on high tech goods and electronics. Samsung, Asia’s largest maker of chips, TVs and mobile phones, reported solid earnings last week, tripling net income and delivering record profits. This is great news for the overall South Korean economy, as it suggests that consumers are getting out of their slump which will help Korea’s export driven economy. In fact, South Korea posted a strong 2.9% GDP gain in the third quarter and may even post a full year GDP gain for 2009.

South Korea has long been a hub of innovation and high tech knowledge; its people rank second in mathematical literacy and patents granted per million people, and first in scientific literacy (data from nationmaster.com). With this commitment to educational excellence, the South Korean economy looks to be in a great position to grow even more in the future.

EWY has nearly 30% of its assets in information technology firms (including nearly 20% in Samsung). While its dividend is minimal it has produced a 14.43% annualized gain over the past five years.

(For a recent look at the Korea ETF click here.)

Risks

Like all investments, there is an element of risk that comes with investing in the TICK bloc. All four countries have their own unique economic challenges, as well as geopolitical issues that they must overcome in order to be universally recognized as developed nations. Due to their small size, many of the nations in the TICK are liable to be bullied by their larger and usually more aggressive neighbors. With the exception of Chile, the rest of the TICK has a hostile neighbor within striking distance of their homeland, clearly a significant risk to economic growth. Even for Chile, there have been somewhat chilly relations between itself and neighbors due to foot-dragging regarding the MERCOSUR pact (PDF) and continued resentment over the War of the Pacific.

Although the TICK bloc might not be as sexy as the BRICs, these four countries offer investors an excellent opportunity to achieve international exposure with relatively lower levels of risk. Think of the TICK as a high class BRIC, suitable for investors who want more diversification out of traditional developed markets but are not completely sold on the prospects of the giant BRIC nations. And for more ETF ideas, make sure to sign up for our free ETF Newsletter.

Disclosure: No positions at time of writing.

Comments

[rdd:]

You can get partly there with a FTSE RAFI Emerging Markets ETF or mutual fund. They currently overweight Korea and Taiwan compared to the regular benchmarks like MSCI while underweighting China, India, and Brazil. They have a small amount of Israel and Chile.

Nov 04 11:06 AM

[mbkelly75:]

NIce article that makes it's point well. I have never like investing in Russia - the government there is too unpredictable and has a rude habit of closing the entire stock market when ever they are unhappy with even a single company in it. TICK would seem a much better idea overall, but I do like Brazil and India better than China although China does have some great buys there also - just not Russia. Thanks for your work on this article.

Nov 04 01:17 PM

[THofler:]

A few years ago I owned a TRowe Price diversified emerging markets fund (PRMSX I think). One of its largest country holdings at the time was S. Korea.

Nov 05 12:15 AM

[Michael H:]

Enjoyed reading this and quoted in my blog on "Israel and innovation". Ties in with recent CNBC feature as well

Nov 05 03:35 AM

[old guy:]

Great article ..I too am afraid of Russia and own the rest of BRICK...just bought EWY Korea yesterday....looking at the rest of TICK. Thanks learned a lot.

Nov 05 05:13 AM

[TraderMark:]

Clever article

Chile has also been run very fiscally conservative- but very reliant on copper.

Nov 05 11:45 AM

[Ricard:]

Interesting article, but I must point out that Taiwan and South Korea have about as much political risk as China. If there is ever a war in that region, more than likely everything within 500-2000 miles of the epicenter will get killed economically. This is especially true of Taiwan - it's not hard at all to argue that its position as a non entity is much more precarious than China's.

If you accept this as given, then it would make more sense to invest in China, as long as prices are not too high.

Nov 05 04:49 PM

[LCACM:]

Investments are about the future and not about the present or the past. Of the 4 TICK Countries, Taiwan, Israel and Korea have dark geopolitical clouds and not much in terms of natural resources. Chile is the exception in that they don't have much geopolitical risk and the country has sizable natural resources.
Of the 4 BRICK countries, all four have significant natural resources and large internal markets. They do have current poliical risks, but not insurmounatble in comparison to their size/potential.

Nov 05 09:13 PM

[Stone Fox C...:]

these are interesting investments to replace more stable investments like the US portion of a portfolio. Still need to BRIC is you want long term superior growth.

Nov 11 04:20 PM

[richjoy403:]

TICK?...well, BRIC made it big, so why not?

My first impression of TICK is that someone is trying to develop the next in-vogue alphabet designation; thus I'm not convinced TICK is anything more than an alphabet game.

Nov 11 04:38 PM

[elgaucho:]

I would like to point out though that Taiwan is in the mist of loosing much of its manufacturing base to neighboring countries such as Vietnam, Indonesia and China for obvious production cost reason. While Taiwan has proven to be a bed rock of technology innovation, asides from Acer, its technology companies generally lack the brand recognition needed to grow in this field. Taiwan must redefine its manufacturing base if it is to continue to prosper in the years ahead.

Good Article; thanks.

Nov 11 05:13 PM

[dieuwer:]

BICK

Nov 11 07:59 PM

[drone:]

I'm not buying any fund invested in Israel because it is a military industrial complex with a heavy weighting towards death and destruction, not unlike the US, which I also will not purchase .

Nov 12 03:26 AM

[Sagan100:]

great article but seems very heavy towards technology...

Nov 12 07:15 AM

[Steve in Gr...:]

Thanks, Mr. Dutram, for the great note.

I would not have thought of the Israel ETF, but it is worth thinking about (which I would not have done without your note).

Maybe an investment in EIS might be hedged with an investment in and oil ETF like DBO. Middle East wars are likely to expand, because of the change in U.S. foreign policy. If they don't EIS will be good. If they do, then DBO will go up.

Nov 12 11:14 AM

[wye:]

"While it is true that BRIC is growing twice as fast, the BRIC will need to grow at a 7% rate for roughly 16 years just to catch up to the TICK’s development level, assuming that the TICKs do not grow at all in that time period."

Isn't that a plus for the BRIC, rather than a minus? More room on the upside, more money to be made (more room for ETF pps to grow for early investors). Korea and Taiwan have already arrived. Chile is definitely worth considering from my POV, and I have a little exposure there through an emerging markets ETF. Israel I wouldn't touch with a 10' pole, for numerous reasons.

Brazil (EWZ) India and China is where the massive growth is happening and will happen over the next 20-30 years. My money is very happily where my mouth is. Kept right on dollar-cost-avg'ing through the 2008 crash, and portfolio is up 40% today thanks to the bargain basement prices at the depths of the crash.

Nov 12 12:19 PM

[Old Trader:]

drone,

While you're certainly entitled to your POV, I've found it to be unprofitable to mix my political views with my investing...fwiw.


On Nov 12 03:26 AM drone wrote:

> I'm not buying any fund invested in Israel because it is a military
> industrial complex with a heavy weighting towards death and destruction,
> not unlike the US, which I also will not purchase .

Nov 13 01:17 AM

[User 512635:]

Israel is a democracy that is fighting for its life against the world's most dangerous and inhuman terrorist countries/groups.
If it was not for Israel these terrorists would come to your house and you would not be able to play comfortably with your tickers and "investments".


On Nov 12 03:26 AM drone wrote:

> I'm not buying any fund invested in Israel because it is a military
> industrial complex with a heavy weighting towards death and destruction,
> not unlike the US, which I also will not purchase .

Nov 13 04:51 AM

[yellowhoard:]

Chile impresses me a lot.

Very well managed country.

Culturally very conservative.

As the rest of South America is taken over by Marxists, many wealthy South Americans will relocate there.

Nov 13 08:00 AM