Clearing Up 3 Single-Country ETF Misconceptions

Includes: DXJ, EFNL, EWJ
by: Sue Thompson

If you have a view about the prospects of a certain country’s market, it’s easier than ever to express it using an exchange traded fund (ETF). The number of so-called single-country ETFs – ETFs focusing on companies based in one particular country – on the market has exploded in recent years.

Currently, there are about 150 such funds in the U.S. market, nearly 30 of which were launched within the last two years and about 50 of which were launched over the last three years. The funds span 38 countries and multiple sectors and currently count roughly $83 billion in assets. Here at BlackRock alone, iShares now offers 54 such funds, up from 29 five years ago, and roughly 40 three years ago.

Yet despite these funds’ growing availability and popularity, misconceptions about them still abound. Below, I attempt to debunk three of the misunderstandings I hear most often.

Misconception: Single-country funds are all small and niche.

Truth: While some single-country funds are small and niche, a number, like those representing the broad Japanese corporate market, are huge and attract a large number of investors. For instance, the iShares MSCI Japan ETF (NYSEARCA:EWJ) has roughly $14 billion assets under management, and the WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ) has roughly $11 billion. These two ETFs are the largest single-country ETFs as measured by assets.

At the other end of the spectrum, extremely niche single-country ETFs representing complicated investment strategies (think “inverse” and “leveraged”) or representing countries that not many investors want to access are much smaller. The iShares MSCI Capped Finland ETF (BATS:EFNL), for instance, has just $37 million under management. In short, not all single country funds are created equal.

Misconception: There’s no reason to invest in single-country funds if you’re already invested in broad international emerging market and developed market funds.

Truth: There may be additional tactical exposures you’d want through a single-country fund, and you may even want to rethink your broad exposure approach and consider a single-country approach instead.

Take what’s happening in emerging markets, for example. As the BlackRock Investment Institute pointed out last year in a paper on investing in emerging markets, disparities among emerging markets are growing fast, as economies and financial markets mature at very different paces. As such, the paper’s authors conclude that the key in emerging market investing today is to focus on companies that generate cash flow in favored geographies, i.e., in select countries. BlackRock’s Chief Investment Strategist Russ Koesterich advocates a similar select-country approach, and you can find out which countries he likes in his latest Investment Directions monthly market commentary. Single-country ETFs are one way to express such country-specific preferences.

Misconception: When you invest in single-country funds, you’re only investing in businesses focused on one specific country.

Truth: Many of the companies in single-country funds are global players, meaning they do business both within, and beyond, their borders. This is why it’s so important to know your true exposure before you invest.

Source: BlackRock

Sue Thompson, CIMA, Managing Director, is Head of the Registered Investment Advisor Group, overseeing the firm’s iShares and 529 sales efforts with registered investment advisors, family offices and asset managers.

Information on the WisdomTree Japan Hedged Equity Fund is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation of an offer to buy shares of the fund.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.