Timing's Right for Five Country-Based ETFs

Exchange-traded funds that track countries offer two powerful advantages over mainstream equities. First, they let investors reduce exposure to region-specific economic disruptions, like slowing growth and the credit crunch. Second, they increase exposure to profit engines that are much stronger than the U.S. and other crisis-plagued nations.

But these unique financial instruments aren't for everyone. In particular, they're a bad choice for short-term traders, because overnight gaps occur frequently, making it hard to exercise tight risk control. These disruptions take place for a variety of reasons, from fund component news shocks to obscure bureaucrats making ill-timed declarations.

As an example, the iShares MSCI Mexico Index Fund EWW gapped down more than 2% on Friday, after American Movil AMX reported weak earnings. Consider the sizable trade risk if you didn't know this issue was heavily weighted in the fund, or that it was scheduled to file its quarterly report on Thursday evening.

Realistically, it's a tough chore to keep track of another country's obscure news flow. That's why these world funds work much better as long-term investments. Over time, the underlying equity basket dampens the impact of component-specific shocks, washing out the influence of one-time events such as the American Movil shortfall.

OK, let's get down to it. I searched my database over the weekend and pulled up five country-based exchange-traded funds that fulfill two specific criteria. First, they're exhibiting stronger performance than the U.S. indices so far in 2008. Second, recent price action shows the development of lower-risk entry levels for interested investors.

iShares MSCI Brazil Index (EWZ)

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Source: eSignal

The iShares MSCI Brazil Index EWZ ETF is a current pick in my TSC newsletter, The Daily Swing Trade. The fund rallied to a new high at $87.67 in November and pulled back. Selling pressure accelerated into January, when price struck a notable low at $64. It recovered quickly from that level and returned to the high in February.

That recovery effort fizzled and gave way to a downturn that retraced 62% of the post-January bounce. The stock then resumed its uptrend, returning to the high for the third time last week. This price action completes a six-month cup-and-handle pattern that should yield a strong breakout in coming weeks.