What's the Best Way to Capture a Country?

A reader asked about the best way to capture a country for an investment portfolio.

Well, sorry to disappoint but there can be no single best way. Depending on the country, there could be a lot of funds, just one fund or no funds.

For countries that do have funds, the makeup of the funds would have to be very relevant for deciding whether the fund is a good fit or not.

As an example, Sweden has an ETF that trades under ticker EWD. I have been favorably disposed to Sweden for quite a while, and wrote about EWD in January 2006 for TSCM.

In that post, while generally positive on EWD, I expressed concern about its then 22% weight in Ericsson (ERIC). That concern came to matter last fall when ERIC plummeted; now the stock has only a 10% weight in the fund. For clients, I have preferred an individual stock for Sweden over the ETF.

For clients for whom 40 stocks don't make sense, however, I have no problem using an ETF for Australia. Most clients own a stock, but I don't hesitate with the ETF for accounts where ETFs are more appropriate.

Brazil is a little less clear to me. I have used a stock for exposure to Brazil in most instances, but have never owned iShares Brazil (EWZ). Brazil is obviously thought of as a resources country but EWZ has a meaningful weight in bank stocks. Over the last year, EWZ is up a lot but the weighting to financials, which have lagged the resource stocks, has caused EWZ to trail behind the the big NYSE, resource ADRs. For whatever reason, I have always preferred one of the resource stocks for Brazil over anything that included financial stocks.

This contrasts (or maybe contradicts) the fact that I use a bank stock to capture Chile. There is an ETF (ECH), which I think highly of, and also a closed end fund (CH). I think any of the three could be fine proxies, more so than with Brazil anyway. Clearly that is a subjective interpretation of the products and the countries.

As mentioned above, there are countries for which there is no fund to serve as a proxy. For some folks, no fund means no dice. This is where it becomes difficult, but foregoing a country for lack of the fund is not ideal, in my opinion. Longtime readers know I have been a fan of Norway for a long time. I have had one stock for about three and a half years and two year sovereign debt since last Spring, and both have contributed significantly to returns in the time I've owned them.

Obviously an investor can only do what they are comfortable with and what allows them to sleep, but that does not mean an investor should not learn more about something they are not comfortable with in order to perhaps reassess what they can do.

Comments

[Ed House:]

The best way to capture a country is obvious. It has already been done. First you replace asset backed currency with worthless fiat currency. Then you make it illegal to own any hard currency (e.g. gold) and force all the citizens to forfeit their hard currency. Then you form a private banking cartel and force all the smaller banks to buy shares in the cartel or you put them out of business. For a more detailed explanation see the Federal Reserve Act of 1913 or read "The Creature from Jekyll Island" by Edward Griffin.

2008 May 12 11:07 AM

[SeekingAlph...:]

Have fun trying to pay for "The Creature from Jekyll Island" by Edward Griffin, with gold.

2008 May 12 06:29 PM

[Chris Schons:]

I'd like some opinions of CH . . .

2008 May 12 10:57 PM

[Nidhi Kadalbal:]

Any better ideas to own New Zealand than using EWA or EPP?

2008 May 13 01:57 AM

[Roger Nusbaum:]

Unfortunately there is no great indexed product to capture NZ. CNZLX is an OEF that had more NZ exposure than any ETF I am aware of a/o it's last report. There are also plenty of ordinary shares you can buy too.

2008 May 13 08:48 AM

[richjoy:]

Mr. Nusbaum -- I've been reading your posting for some time. Thanks for the good work.

2008 May 13 10:03 AM

[Roger Nusbaum:]

thank you

2008 May 13 07:08 PM

[Linkster:]

It would be interesting to know what stocks you have selected to represent your interests in Brazil, Chile and Norway.

2008 May 13 07:40 PM

[David Hunkar:]

I also prefer individual stocks, if available, over ETFs. Many of these country specific ETFs are heavily weighted towards one sector or another. For eg. - EWO the Austrian ETF is heavy in financials. In some country ETFs just one sector make up nearly 50% of the portfolio which is not good.

Thanks Roger for the neat article.

2008 May 30 04:53 AM