As Americans -- and especially those of Italian heritage -- celebrate Columbus Day on Oct. 8, some might care to see if Christopher passed up some profitable investments in his country of birth when he set off to find a shortcut to Asia.

The purest diversified U.S. play in the Italian stock market, the

iShares MSCI Italy

(EWI) - Get Report

exchange traded fund, has outperformed the total-return

S&P 500

by some impressive margins in recent years. Its largest holdings include

ENI SPA

,

Unicredito Italiano SPA

,

Intesa Sanpaolo SPA

,

Telecom Italia SPA

(TIT) and

Assicurazioni Generali

. (None are traded in the U.S.)

The iShares Italy ETF's performance has been generally uninspired to this point in 2007, up 4.9% through the end of September vs. 9.13% for the S&P 500 total-return index and 10.89% for the MSCI EAFE index of international stocks. But it more than doubled the S&P's return in 2006, more than tripled the domestic gauge in 2004.

The fund rewarded its holders with a gain of 39.18% in calendar 2003, more than 10 percentage points better than the S&P's 28.69% gain for that year. Its decline of 7.00% in calendar 2002 was considerably less damaging than the S&P's 22.10% setback. In each of those years, it bettered the international MSCI EAFE index.

The one calendar year in the past five that it lagged the U.S. and international benchmarks was 2005 when the iShares Italy ETF edged 1.88% higher, well behind the S&P's 4.89% gain and the MCSI EAFE's respectable 14.02% return.

Pure Play
The iShares MSCI Italy has outperformed the S&P 500 by impressive margins in recent years

Click here for larger image.

Source:

The third largest Eurozone economy, behind Germany and France, Italy's gross domestic product has been crawling ahead, with growth estimated to total 1.3% this year. But in the second quarter, the nation's economy inched up at an anemic 0.1% pace.

Italy's economic progress is saddled by public debt that amounts to 106% of GDP, the highest percentage of the Eurozone community.

Although the nation's 6.0% jobless rate is lower than the Eurozone average of 6.9% and well below France's 8.0% unemployment or Germany's 9.0% rate, it stand's higher than the U.S.' 4.6% rate.

Still, a trade surplus of 1.81 billion euros ($2.56 billion U.S.) in July indicates an economy that is showing some signs of life. This came in spite of a shrinkage in industrial output of 0.4% in July to follow up on a downwardly revised setback of 0.6% in June.

Despite the economic uncertainty, if Italian Prime Minister Romano Prodi's center-left government can get the nation's economy back on track, any gains in its stock prices would be magnified for U.S. investors if the value of the euro should continue to appreciate vis-à-vis the dollar.

A few days ago Prodi's cabinet presented a budget bill that would shrink the government's deficit from an estimated 3.0% of GDP this year to 2.2% in 2008. Last year the budget shortfall amounted to 4.4% of GDP.

The budget, which must be approved by the Italian Parliament, reduces the main corporate rate from 33.0% to 27.5%.

While the iShares Italy ETF remains the purest diversified Italian play, a search of TheStreet.com Ratings' database found two open-end mutual funds and six ETFs with respective portfolio exposures of at least 10% in Italian-domiciled investments. Sorted in descending order by percentage exposure to Italian investments, they are listed in the nearby table.

Italy Funds

With the exception of the iShares MSCI Italy Index Fund, they all outperformed the S&P total-return index through the first nine months of 2007, with six of the eight in double digits for the year to date.

For the past three years, the four funds with sufficient history have returned more than 20% annually, easily outdistancing the S&P's 13.16% annual return for the period.

Most impressively, each of the four Italian-heavy ETFs with enough history to earn grades from TheStreet.com Ratings have the highest possible mark of A+. The one open-end mutual fund with sufficient history for a grade has a mark of A-.

The 10 most popular Italian holdings of all U.S. funds -- including open-end mutual funds, closed-end funds and exchange traded funds -- are listed in an accompanying table.

Richard Widows is a financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.