Today's economy is becoming more and more intertwined. Greece failure? Better hope you stocked up on that VIX hedge. Egypt flaring up again? Luckily you bought those out-of-the-money SPY puts.
But while major markets can certainly move in unison - a simple principle known as correlation - different countries may have different gains each year. Upset because the S&P only gained 6%, including dividends? Perhaps another country gained 12%.
While many investors love to diversify by buying commodities like natural gas or oil (note: both links take you to articles that I just wrote - they could be helpful for diversification), country ETFs offer a more specific type of exposure.
Below are five country ETFs that are often overlooked, and a few strengths and weaknesses of each.
iShares Brazil Index (EWZ)
- The fund dropped 18.4% during the second quarter and now trades closer to its 52-week low of $48.27 per share.
- The ETF yields 2.85% annually as EWZ trades around the $51 area.
- Brazil raised its interest rates to as high as 12.5% throughout 2011 in an effort to curb inflation that reached 6.75%. As a result, investors clamored for bonds denominated in Brazilian Reals, pushing the currency upwards. To reverse this action, the Brazilian Central Bank has been buying U.S. Dollars in an effort to devalue Brazil's currency, the real. A weakening real means increased exports for the export-driven Brazilian economy.
- Also, Brazil has been slicing its interest rates in an effort to rejuvenate lending.
- Brazil faces headwinds as expected demand for its exports dwindles from emerging countries like China.
- Brazil's currency is often influenced by the price of commodities, and Brazilian equities are affected by the price of its currency, which can determine export prices.
- If the U.S. markets take a downturn, investors could sell their holdings -- including holdings in EWZ -- and park the money in government bonds or cash. This would depress EWZ's price further.
Market Vectors Vietnam Index (VNM)
- VNM has a yield of .9% as the price trades near the $17.30 area.
- According to author Peter Pham, Vietnam experienced incredible inflation of 23% and expanding credit of 28% in 2011, causing an industrial and housing boom. However, the Vietnamese government dropped lending rates to 16% then 12% in an effort to trim inflation. The result: Vietnam's CPI is now at an annualized 8.34%.
- Vietnam's financial system is evolving quickly, as evidenced by more companies going public
- The Vietnamese demographic is quite young - according to the CIA World Factbook, the median age in the country is 27.8 years. For comparison sake, the United States median age is 36.9 years.
- VNM does not see much trading volume and does not have options - the Vietnamese economy is still small. NAV is only $301 million.
- Privatization of the giant, public companies is happening slowly because Vietnam is a communist country.
- Vietnam has low reporting standards for companies, and the companies do not have constant interaction with equity analysts.
- Poorly trained labor and lack of sufficient education for the young demographic is a problem to be overcome.
iShares Malaysia Index (EWM)
- Price to earnings of 14 with an attractive trailing twelve months yield of 3.83%.
- Malaysia has an IPO market that is becoming hot. Depending on your viewpoint, this could be a pro or a con.
- Population growth is important in small economies. Malaysia doubled in size from 13.7 million in 1980 to 28.3 million in 2010. While the nation is still very small, increased population growth means more GDP growth coming from consumption compared to exports. And the larger the population, the more quickly the nation's population growth rate (1.6%) will impact consumption.
- EWM's top 10 holdings comprise 54% of the entire fund. While this is not entirely unusual for an emerging country ETF, it is worth noting.
- EWM holds 4.75% in Petronas, a state-owned company that pays 55% of its earnings to the government. That has certainly curbed growth of the company, and is a risk of state-owned companies in Malaysia. The average dividend payout to the government for state-owned companies is 38%.
- Petronas' dividend makes up 45% of Malaysia's budget. You may also view this as a pro, with the logic that Malaysia will not let Petronas fail.
iShares Hong Kong Index (EWH)
- EWH has net assets of $1.55 billion and a yield of 3.35%, making it a far more liquid ETF compared to its peers.
- EWH's holdings are weighted heavily in favor of the financial sector and real estate, making the ETF a ripe prospect for growth in bullish times. The financial sector often leads rallies, but it is also hit hard in recessions.
- Hong Kong is ranked as the #1 most free nation by www.heritage.org. The website ranks companies based different freedoms, such as rule of law, limited government, regulatory efficiency, and open markets. For perspective, the United States is ranked #10.
- Investors are wary of China, because the government makes it difficult to withdraw dollars from Chinese investments. Instead, investors must convert to the yuan, and have difficulty converting back. Hong Kong is the opposite. The country faces a free flow of capital from the outside world with very little restrictions. While this is one of Hong Kong's greatest strengths, it is also a major weakness.
- The reason this is a weakness is because small investors can get trampled by larger investors. Hong Kong is relatively small, and major moves from large institutions can make the markets instantly volatile.
If you are looking for more information on Hong Kong, I found this site to be data-rich.
iShares South Africa Index (EZA)
- Africa has been attracting venture capital dollars as of late. In an interview with VC Eelco Benink, Benink says:
Africa in general is growing and developing rapidly. Many African countries are amongst the fastest growing in the world. Furthermore many trends and economic fundamentals in Africa are favourable: the relatively young population; the increased political stability; an increasingly wealthy middle-class; abundant natural resources, land and labour; and government policies aimed at market liberalisation. Compared to other countries in Africa, people in Kenya are well-educated and the infrastructure is good. For that reason many funds are choosing Kenya as their investment destination or as a hub from which they serve the region.
To learn more about the pros of investing in Africa, I found that David Frum writes a compelling analysis in comparing Africa to Facebook, and this article, despite being dated, provides more succinct details on the pros of investing in Africa.
- EZA is a small ETF, with the three month average volume just under 290,000. With a price around $63, this suggests that only $18.2 million changes hands every day.
- EZA holds no utilities, and in lieu holds cyclical sectors.
- Africa is still small, leading to two dangers. First, corruption is a risk in up-and-coming economies. Second, a small market means that liquidity can be low.
Rather than recommend investments, I have briefly outlined the advantages and disadvantages of five often-overlooked nations.
Most importantly, take note of the correlation of these assets compared to your current holdings. To do this:
- Pull up a correlation analysis of each chart and/or
- Overlap the chart with a chart of the S&P 500.
I trust that you will be able to take these simple analyses and wrap them into more due diligence in order to diversify your portfolio and to add growth opportunities.
Disclosure: I am long VNM.