Single Country vs. Regional ETFs: Regionals Maintain the Upper Hand

At the end of March, Barclay's launched the iShares Turkey Index Fund (TUR). Presumably, one can invest in this single country's market with greater ease and efficiency than by using an actively managed mutual fund.

It's been a mere 6 weeks and the investment is up 8% out of the gate. Sound like a winner and an undeniably strong selection... right? However, most emerging market investments have gained the same amount since April 1.

Consider the original... the iShares Emerging Market Index Fund (EEM). Although it is clearly too early to be unequivocal in recommending the diversified exposure of EEM over the single country index fund, I've made the case for regional ETFs over single country ETFs in several previous posts.

Single-country ETFs tend to be more volatile... both above and below a regional index. What's more, the single-country selections rarely "out-gun" diversified regional indexes over the long haul.

For instance, fans of the MSCI Mexico Index Fund (EWW) have little reason to be disappointed with a 300% cumulative 5-year return from May 15, 2003 to May 14, 2008. Still, the diversified iShares Latin America Fund (ILF) has rocketed towards a 600% showing.

There are certainly examples of when a country fund like the Singapore Fund (EWS) has out-maneuvered regional plays like the iShares Asia Pacific excluding Japan (EPP). Still, it is difficult to know whether a sojourn into Turkey will play out more or less favorably than generalized emerging market participation.

On 5/14/2008, Tim Seymour from the popular CNBC series, Fast Money, discussed Turkey as an emerging market possibility. He considered TUR in terms of deserving a "C" for its macroeconomics, a "B" for its investability and an "A" for valuation. (I have also written extensively about the pros and cons of investing in Turkey.)

The risk-reward relationship continues to favor regional investing over single-country selections. We have iShares Emerging Markets (EEM), Vanguard Emerging Markets (VWO) and Claymore's BRIC Fund (EEB). And they work!

The Middle East and Africa Fund (GAF) was an admirable start to Middle Eastern ETF exposure, but it is primarily an investment in Israel and South Africa. Still, there are plenty of regional funds coming such that - I believe - a Middle Eastern ETF would be a better choice than "Turkey by its lonesome."

Disclosure: The author is president of Pacific Park Financial, Inc., which may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[haydete]

Ummm, ILF is essentially made of EWW and EWZ. If EWW underperformed ILF, then EWZ (a single country) outperformed it.

[arkay]

Precisely. When you compare, you need benchmark this against the more example. Not the example that suits you.

While I do agree the broad basket is better, you cannot ignore selective individual country opportunity. EWZ - Brazil is individual country play that you cannot ignore. You should certainly have some stake in RSX - Russia. Right now India & China has gone down so significantly, FXI and INP can be played individually or part of EEM.

I would certainly not make individual bets in countries such as EWW, TUR, EWT, EWS - which are all promising. But would rather be a part of basket.