The Four Best Single-Country ETFs

Trying to determine which single-country ETF (an ETF that invests 100% of its assets in one country) offers the best reward-to-risk can be a daunting task. Where to begin is the first question that arises. I decided to look at the performance over the last two years during both up and down market cycles and compare that with the performance of the S&P 500. Some of the timeframes used in the study include the February/March pullback, July/August pullback, the current correction, calendar year 2006, and year-to-date.

Of the 25-single country ETFs analyzed it was clear there were a few ETFs that consistently beat the S&P 500 during both up and down markets. If we were to only analyze the up markets the winners would be the high-beta emerging market countries such as China and Brazil. However, during the sell-offs in the US, these same high flying countries tend to fall much faster than the US, resulting in average reward-to-risk setups.

In my opinion the ETF that has offered the best reward-to-risk opportunity has been the iShare MSCI Spain ETF (EWP). In 2006 EWP was the fourth best performing ETF in the study with a gain of 48% versus a gain of 13.6% for the S&P 500. So far this year EWP has kept on chugging along with a rally of 25% through 11/23; during the same timeframe the S&P 500 has moved a mere 1.6%. Even more impressive is the relative strength EWP has shown since the S&P 500 hit a high on 10/9/07. The US index has fallen 8% and EWP has returned a gain of 9% to its investors. During the July/August sell-off when the S&P 500 lost over 9%, EWP lost 8% and was the second best performing single-country ETF. The only time EWP has lagged was during the February/March pullback where the S&P 500 fell 6% and EWP lost over 9%.

Another Western European country, Germany, has shown strong relative strength the last two years. The iShares MSCI Germany ETF (EWG) lagged EWP in 2006 with a gain of 32%, but still remained well above the return of the S&P 500. In 2007 EWG has flexed its muscles and is up 29% through 11/23, beating out EWP. During the market pullbacks ranked fifth and fourth in July/August and current correction, respectively. In February/March when the S&P dropped 6%, EWG fell 8%, slightly better than EWP.

Of the developed single-country ETFs, EWP and EWG stand above its competitors when ranked by both risk and reward. In general the Western European countries offer a better opportunity for investors that seek modest growth and at the same do not want to take the risk directly associated with the US stock market and slowing economy.

Of the emerging market single-country ETFs, two countries finished at the top of the list. The first ETF, iPath MSCI India ETN (INP), began trading in December of 2006 and has been a leading since that time. Year-to-date, INP is the top performing ETF in the study with a gain of 68%. During the recent sell-off INP is the also the leader with a gain of 11%. The only other ETF with a gain is EWP. The one issue is that INP has underperformed during the other two pullbacks this year.

The second emerging market ETF is the iShares MSCI Malaysia (EWM). EWM is the third best performer during the current correction, number four year-to-date, and returned 33% in 2006. The two earlier pullbacks saw EWM underperform both the S&P 500 and INP and is why INP got the nod.

Disclosure: none