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 Quote) gapped down more than 2% on Friday, after American Movil (AMX Quote) 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. ...