ETFs for Countries With Wiggle Room

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NEW YORK ( ETF Expert) -- There's a tendency for many writers, analysts and money managers to lump all industrializing nations into a single entity. For better or worse, the popularity of Vanguard Emerging Markets ( VWO) and iShares MSCI Emerging Markets ( EEM) illustrates the way the developed world chooses to invest money. (Heck, Jim Cramer recently described the investing environment in terms of a four-legged stool, anchored by the U.S., Europe, China and the "emerging markets.")

The merits of aggregation aside, some governments in specific emerging economies have more ability to stimulate economic activity than others; that is, there are countries that may be able to lower interest rates or enact spending initiatives comfortably, and there are those where debt ratios and/or inflation are too high for fiscal and monetary easing.

In the 1/28/2012 edition of The Economist, there's a fascinating feature on exactly which countries may have the most wiggle room to ease. The publication devised an index that incorporated inflation, excess credit, real interest rates, currency exchange movement, current account balance, budget balance and government debt. (Note: My preference might have included a grade for political climate as well, but perhaps that might have been too subjective.)

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The Economist contends that the resulting "wiggle-room index" offers a rough idea of which emerging economies might be better positioned to deal with economic weakness. It turned out that Indonesia, China, Singapore, Chile and South Korea had the most room of 27 "emergers" to maneuver on fiscal and monetary policy, whereas Egypt, India and Poland had the least.

How might this information be useful to ETF investors? Below, I laid out the 2011 performance for each country fund as well as the month-over-month performance here in 2012.
Emerging Market ETFs: Country's Room to Ease Fiscal and Monetary Policy
Entire Year 2011 % 1 Month %
Most Room to Ease
1 iShares MSCI Indonesia (IDX) -0.6% 11.2%
2 PowerShares Golden Dragon China (PGJ) -25.0% 12.8%
3 iShares MSCI Chile (ECH) -26.5% 9.7%
4 iShares MSCI South Korea (EWY) -13.5% 11.9%
5 iShares MSCI Singapore (EWS) -18.8% 15.9%
6 Market Vectors Russia (RSX) -28.2% 17.5%
Least Room to Ease
6 iShares MSCI Turkey (TUR) -36.6% 24.0%
5 Market Vectors Vietnam (VNM) -43.8% 19.2%
4 iShares MSCI Brazil (EWZ) -37.3% 17.7%
3 iShares MSCI Poland (EPOL) -32.0% 20.8%
2 WisdomTree India Earnings (EPI) -40.5% 27.7%
1 Market Vectors Egypt (EGPT) -51.7% 31.9%

One thing that it is abundantly clear, stocks had already been factoring in which emergers have less room to ease. Indeed, the ETFs for countries with the least maneuverability were brutalized the most in 2011. For example, BRIC components PowerShares China ( PGJ) and Market Vectors Russia ( RSX) experienced drawdowns of -25.0% and -28.2% respectively. And yet, BRIC components Brazil and India fared even worse, with Brazil (EWZ) plummeting -37.3% India (EPI) shedding -40.5%.

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