Survey of 6 Country ETFs By Sector Weight

Country equity funds differ in a number of ways. They vary in sector weights, currency exposures, political risks, stock market liquidity risks, interest rate and inflation risks, and other factors.

To illustrate the point, let’s look at the different sector weights in six passive country index ETFs from Barclays for the Americas.

• (ILF) (Latin America)
• (EWZ) (Brazil)
• (ECH) (Chile)
• (EWW) (Mexico)
• (EWC) (Canada)
• (ISI) (USA)

You can see from the chart that the sector weights vary considerably from country-to-country.

Canada and Brazil with a heavy energy weight will tend to do well when oil is high, but less well or poorly when oil declines. However, Canada also has a large financial company exposure to the current global credit crisis. That has dulled the advantage of being heavy in energy compared to Brazil which has less financial company exposure.

Mexico is heavy in telecommunications which did and may create strength when major new trends or technologies materialize in cellular and related areas.

The USA has a good size slug of healthcare exposure, but the other Americas country funds do not.

The Mexico fund is much more dependent on domestic consumers than the other country funds (except the USA which is also significantly consumer exposure weighted).

Chile has the highest industrial and utilities weights.

These sorts of comparisons are important if you decide to take country-by-country exposure, instead of a core portfolio with a few funds that create a global market cap balance.

When you buy a country index fund, you assume the particular set of risks associated with the companies in that index — which presumably is representative the country’s investable market as whole. When you buy an actively traded country fund, you assume the particular risks the portfolio manager chooses to take from time-to-time — no real way to know except in arrears.

Even if you don’t invest in equities abroad, you are taking country risk. If you invest in your home market, whether it be the USA, Germany, China or wherever, you assume the risks of that country versus the world as a whole.

The most neutral equity risk you can take is probably to own a market cap weighted world index fund, or to cobble together a few funds that create the same allocation — such as (VTI) (for the USA) plus (VEU) (for the world excluding the USA); or VTI, plus (EFA) (for the developed world excluding the USA and Canada), plus (EWC) for Canada, plus (VWO) (for the emerging markets, excluding the frontier markets).

Since we live in globally integrated world, a globally balanced equity portfolio may be the most neutral risk you can take in the long run.

As soon as you weight any country more than its global weight, you begin to make positive and negative country bets. You are betting positively on the country you overweight, and negatively on the country you underweight.

Keep in mind that staying home (regardless of you home country) is not avoiding country risk. It is making a massive overweight bet on your home country and all its good and bad potential, while making a massive underweight bet on the rest of the world.

With money, there is no such as no bet. Doing nothing is doing something. Staying domestic is betting against global. There is no place to hide. You need to decide whether to be neutral or to have biased weighting in your equity portfolio.

Comments

[d_teller:]

When it comes to rebalancing, say because EWZ has appreciated vs a U.S. fund, you can easily lose the sector balsnce that you had originally ... and it can get really complicated.

The applicable sectors are well illustrated, above, but the BIR assignments of many foreign companies are totally BIZARRE!. In some cases, it may be better, with "new money" to adjust the sector weight in a particular portfolio, by purchasing individual securities that you have researched (ADR's, come to mind) which are in the currently "underwighted sectors", rather than more of the ETF.

2008 Apr 07 08:51 PM