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Home (or away) alone: How to use single country ETFs

Home (or away) alone: How to use single country ETFs

What if you like Asia as an investment idea but really want to focus on say Thailand but avoid India?

Welcome to the world of single country ETFs.

There are no fewer than 377 single country funds in Europe, according to Morningstar, with combined assets of £171 billion. They range from well-established, blue chip and liquid corporations in the UK and the US to the burgeoning tech sector in Taiwan and the state-owned corporations of Russia.

‘Single country ETFs are useful instruments to express a view on economic and geopolitical events at the country level,’ says Hortense Bioy, director of passive research at Morningstar, Europe. ‘They can be used tactically to overweight a country exposure in a portfolio.’

Beware volatility

Such ETFs are more volatile than regional ETFs, explained IG portfolio manager Oliver Smith, and they give investors the opportunity to both make and lose money more quickly than they would otherwise.

Smith recommends holding broader, regional funds as a core holding and picking single country ETFs for shorter term, tactical exposure.

For emerging markets investors, ‘opportunities emerge in Brazil, Russia, Turkey and South Africa, where risk aversion sees both the equity market and the currency fall at the same time,’ he explained.

‘When sentiment returns, large gains can be made quite quickly.’
Bioy agrees ‘Country ETFs tend to be more concentrated at the stock and sector levels than regional and global ETFs.’

But as Ben Kumar of Seven Investment Management argues, even some broad market funds can be quite concentrated at a country level. As he points out,  MSCI World Index holds almost 60% in the US, and the MSCI Emerging Markets holds more than 30% in China.

Just how home is home?

But what can be perceived as home bias can be misleading. For example, only 28% of FTSE 100 revenue is generated in the UK.

‘In developed markets correlations are quite high as the largest listed businesses tend to have a global reach,’ added Smith.  That being the case, single country funds may work best in emerging markets. 

‘A recession in the US will have a knock-on effect in European markets,' says Smith. 'Only in emerging markets do countries march to their own drum beat.

'For example, a coup in Thailand would have no impact at all on Taiwan. Therefore, you can reduce geopolitical risk, but you increase single country risk.’

If there is a downside, it's that you have to pay for specialism.

While investors can access the whole S&P 500 Index for ETF fees of 0.05%, they would have to cough up 0.85% for the db x-trackers FTSE Vietnam UCITS ETF.



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