What Are Country ETFs?
The easy way to invest in foreign countries
Exchange-traded funds (“ETFs”) have become a popular way for investors to easily build exposure to specific asset classes. With their low costs, tax efficiency, and equity-like features, investors have poured more than $1.7 trillion into over 1,500 ETFs trading in the U.S. alone. The same simplicity has also made ETFs an attractive option for international investors looking for exposure to specific countries.
In this article, we’ll take a look at why so-called Country ETFs are a great option for international diversification and some important considerations for investors.
International investing was a complicated endeavor in the past, with foreign brokerage accounts and international tax law. Since the 2000s, many investors have been using either American Depository Receipts (“ADRs”) or international ETFs in order to gain exposure to international markets without having to purchase any foreign securities subject to foreign regulations.
American Depository Receipts are a great way to buy stock in an individual foreign company without having to buy foreign stocks directly, but they tend to have relatively low liquidity compared to other U.S. stocks and maintaining a portfolio can be difficult and time-consuming. Investors looking for exposure to a specific country might instead want to consider so-called Country ETFs.
Country ETFs 101
Country ETFs provide exposure to a specific foreign country, such as China or Germany. By holding a basket of foreign stocks representative of that country’s economy, these ETFs provide U.S. investors with an easy way to gain exposure to the country with buying foreign stocks. Country ETFs – at least for popular countries – tend to be highly liquid as well, which reduces liquidity risks for investors.
Some examples of Country ETFs include:
- MSCI Canada Index Fund (EWC)
- MSCI Germany Index Fund (EWG)
- MSCI Malaysia Index Fund (EWM)
iShares, the largest ETF issuer in the world, has over 50 different Country ETFs providing exposure to nearly every corner of the world. In addition to iShares, there are hundreds of other ETF issuers including many that provide their own Country ETFs to investors, including Global X, Market Vectors, Barclays, SPDR, Wisdom Tree, Vanguard, and others.
Investors should carefully explore their options before investing in a specific country ETF because there may be several different options at various expense ratios or levels of liquidity. In some cases, it might make sense to invest with a less popular option that provides a better value.
Researching Country ETFs
Country ETFs provide easy exposure to specific countries around the world, but investors should carefully read the ETF’s prospectus to fully understand the risks and other important considerations. Often times, these prospectuses can be found on the issuer’s website or by contacting the issuer directly to receive them via e-mail or regular mail to review before buying the ETF.
The most important considerations when researching these ETFs are:
- Sector Exposure – Is the ETF over-exposed to a specific industry? If so, how does that mesh with the rest of your portfolio?
- Company Exposure – Is the ETF over-exposed to an individual company? If so, should you just purchase the ADR instead of the ETF?
- Expense Ratio – How much does the ETF charge to manage assets? Are the fees too high to justify given the potential returns?
The answer to many of these questions depends largely on the individual investor’s portfolio. For example, over-exposure to a specific industry may not be a problem if that industry is under-represented in the rest of their portfolio. Investors should carefully evaluate these criteria before buying Country ETFs in order to avoid any problems with diversification or performance.
- International investing has become a lot easier with the advent of Country ETFs, which provide easy exposure to a basket of securities representative of a country’s economy.
- International investors should carefully consider sector exposure, company exposure, and expense ratios by examining a Country ETF’s prospectus before committing any capital.