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Seven Most Corrupt Country ETFs

Some of the world's fastest growing economies also happen to be extremely corrupt. These ETFs offer exposure to these nations.

By Eric Dutram of ETF Database

Investing in emerging and frontier markets can often help investors to diversify equity holdings and provide exposure to growth opportunities not available in advanced economies. But with any opportunity for big gains often comes significant risk, including the potential for political instability, currency revaluation, and government intervention in the private sector.

There's also the issue of corruption in the world's developing economies. While corruption exists everywhere, it is a way of life in some countries and has the potential to significantly impact returns on both foreign and domestic investment.

A

recent corruption perception index survey

from Transparency International ranked countries from least corrupt to the most corrupt, taking into account the results of 13 independent corruption surveys. The top of the list consists of countries such as New Zealand, Denmark, and Singapore (the U.S. ranked 19th), with countries such as Somalia, Afghanistan, and Myanmar at the very bottom.

One trend is readily apparent: The world's developed markets dominated the top, with emerging markets lagging behind and "failed states" bringing up the rear. While investing in several of the most corrupt countries isn't an option for U.S. investors, several that scored very poorly are available through ETFs.

Russia: No. 146 out of 180

Russia has been a notoriously corrupt country since Soviet days, and despite noticeable improvements, general corruption has continued into the Putin/Medvedev era. Russia tied with Sierra Leone and Zimbabwe in this survey, putting the BRIC nation's corruption in perspective. As just one example, Ikea recently declared that it would

halt investment

in Russia, due to omnipresent concerns over bribery and other payouts to obtain state services.

ETF Results

: The

Market Vectors Russia ETF

(RSX) - Get Report

is up 140% over the past year, one of the best performers during that period.

Vietnam: No. 120 out of 180

Recent corruption problems in Vietnam have included the use of proceeds for World Bank projects to gamble on European

soccer matches

, a shocking tale even in the least ethical corners of the world. Revelations like these have helped to set back this dynamic Asian economy, which is still among the fastest growing in the world.

Signs of progress are showing in Vietnam.

Intel

(INTC) - Get Report

recently pledged to build a $1 billion factory without corruption. But for the time being the country remains among the most corrupt of the investable frontier markets.

ETF Results

: Since its inception in August, the

Market Vectors Vietnam ETF

(VNM) - Get Report

is essentially flat, gaining just 0.1%.

Indonesia: No. 111 out of 180

Indonesia is a vast country both in terms of land mass and people (the nation currently ranks No. 4 in terms of total population). In its post-dictatorship era, the country has looked to decentralization to better manage the country.

The problem is that now instead of having to pay one bribe to the federal government, many

smaller bribes

are required in order to appease each and every one of the many public officials that may be able to influence a project. This has led to a new kind of bribery bureaucracy that runs lockstep with the Indonesian government.

ETF Results

:

Market Vectors Indonesia Index ETF

(IDX) - Get Report

has been one of the strongest equity performers over the past 52 weeks, posting a gain of 170%.

Mexico: No. 89 out of 180

A major problem in Mexico is drug trafficking, as it becomes

increasingly difficult

to isolate the crooked cops from those that are being paid of by the cartels. However, President Calderon has led a sweeping campaign to attack the cartels and cut down on corruption since his recent inauguration. This campaign has seen some moderate successes but also some gruesome setbacks, and has called into question the ability of the government to protect its employees and citizens from increasingly defiant gangs.

TST Recommends

ETF Results

:

The iShares MSCI Mexico Index Fund

(EWW) - Get Report

has posted a gain of 77% over the past 52 weeks, more than double the return of the

S&P 500

.

Thailand: No. 84 out of 180

In addition to the low public official salaries, Thailand has been a relatively unstable country politically, with 15 constitutions between 1932 and 1997. These two factors keep Thailand among the world's most corrupt countries, with little prospect of changes anytime soon. However, the country remains a staunch U.S. ally and the King of Thailand remains personally popular with the Thai people, despite the vast number of changes politically over the years.

ETF Results

:

The iShares MSCI Thailand Investable Market Index

(THD) - Get Report

has gained 72% over the last year.

India: No. 84 out of 180

Corruption in India is so widespread that there has even been talk of priests taking part in the practice by

selling baptism certificates

. In years past, companies such as

Coca-Cola

(KO) - Get Report

have pulled out of the country over concerns regarding their product protection laws. India has seen a volatile market over the past four years as many grow concerned over the inability to provide a decent infrastructure and other services for its citizens.

ETF Results

: The

iPath MSCI India Index ETN

(INP)

posted a gain of nearly 100% over the last year. For a complete guide to India ETFs, see this

recent article

.

China: No. 79 out of 180

Recent cases in which communist party officials doubling as drug kingpins who

amassed fortunes

by taking bribes have highlighted the extent of corruption in

China

. The country has been able to deflect most of the international issues associated with corrupt party officials thanks in large part to its more corrupt neighbors and the country's growing importance to the global economy.

ETF Results

: The

iShares FTSE/Xinhua China 25 Index Fund

(FXI) - Get Report

is up an impressive 47% over the past year, while the

Claymore/AlphaShares China Small Cap ETF

(HAO) - Get Report

is up nearly 100% during that period.

Nice Guys Finish Last

As evidenced by the impressive returns for many of these funds, countries that are perceived as corrupt can still make excellent investment opportunities. Concerns over potential corruption can often push pricing multiples lower, creating the potential for big gains if progress towards developed status is made. Investors must first weigh the risks and costs of corruption with the chance to obtain outsized gains.

Volatility is a double-edged sword that applies on both the way up and way down. During the impressive rally of the last year, many of the world's more corrupt markets have surged, outpacing the U.S. and other developed, stable economies by a wide margin.