The Globe and Mail published one of the most useless ETF articles I have ever read, stopping just short of calling single-country funds a blight to mankind. It even included a quote from Morningstar that said, "I'm just not a fan of the single-country ETFs, pretty much across the board. I think most long-term investors can do without them." I can't recall Morningstar ever being early, or in this case late, in exploring the positive aspects of anything related to ETFs.
A country fund, and for that matter, sector funds and individual stocks, can be dangerous or docile; it depends how they are used. The article mentions the
iShares Singapore Fund
going down by 75% in 1997-98 as an example of why country funds are "so" risky.
Hmm, I can think of another country fund that nearly cut in half more recently, and that country is still besieged by deficits, debt and possibly a weakening currency. This, too, sounds like a bad bet: the
. Using the Singapore ETF narrow reasoning, wouldn't the recent blowup in
be a reason to never own individual stocks? It dropped by two-thirds in just a few days!
A Simpler View
Articles like this frustrate me to no end because they do nothing to try to help readers learn how to explore and assess various investment choices. Morningstar notes the difficulty of "examining the economic and political factors at work in individual countries and trying to use this data to pick winning funds on a consistent basis."
I actually think this is 180 degrees incorrect. Just about every country I have explored as a potential investment has far fewer moving parts than the U.S. market and economy, making them easier to analyze. More often than not, economic strength (relative to the region) can go a long way toward putting the odds in your favor. You guarantee yourself nothing, but look back at my articles on
Sweden. I promise you the analysis was very simple, possibly due to the lack of complexity compared with the U.S., of these countries.
It's Not What You Use, It's How You Use it
We learned during the tech bubble that owning a search-engine stock, an ISP stock and a B2B stock did not make for good diversification. So it is that a fund from Taiwan, Thailand, Malaysia and Singapore taking up 30% of a portfolio is unlikely to be good diversification either. This would be a valid argument against certain uses of single-country funds, not against the funds themselves.
If you want to own Asia, your tolerance for volatility will tell you whether to stick with a regional fund or not. If you can take on single-country volatility, part of the process has to be deciding what country you want to own and the best way to capture that country -- a stock or investment product.
If you care about diversification, you are probably going to have more foreign exposure than just Asia, like maybe Europe or Australia. The best chance of success is exposure to many different countries that rely, economically, on different things, such as exports or internal growth. Blending different countries (or for some folks, regions) that react differently to certain events creates a zigzag effect that can reduce volatility in times of turmoil.
For example, the crash in Thailand last week would have a better chance of affecting Malaysia than it would Belgium.
I mention Belgium because the
Globe and Mail
article specifically picks on the
iShares MSCI Belgium Index Fund
because 50% of the fund is in the top three holdings. While three stocks comprising 50% of a fund is far from ideal, there are not too many ways to narrowly invest in Belgium for people who want to. ADR.com only lists four Belgian ADRs, and I was not able to find a traditional mutual fund that only invests in Belgium. For now, flawed as it may be, EWK could be the best way to own Belgium, but the
Globe and Mail
article never addresses that possibility.
Despite the impression given by the article, there are a number of better-diversified single-country ETFs out there. I would suggest doing some research on
to see whether they are diversified enough to fill some holes in your investment portfolio.
There is no shortage of content to tell you not to invest in something, but I don't think people can learn from it. Do you really need someone to tell you a foreign stock is riskier than a country fund, which is itself riskier than a regional fund, which is riskier than
iShares MSCI EAFE
? I don't think so. These all carry varying degrees of risk and require varying degrees of monitoring, but risk by itself is not much of a determinant of utility.
At the time of publication, Nusbaum held no positions in the stocks mentioned, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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