The great thing about exchange-traded funds, or ETFs, is that they allow for lots of versatility and give retail investors easy access to markets and asset classes they might have trouble investing in otherwise.
This trend is perhaps most evident in the preponderance of country-based ETFs that give folks direct plays on a region and its underlying investments.
Of course, 2013 has been pretty rough for most international investments thanks to a continued slowdown in China and the hangover from the eurozone debt crisis sapping growth on the other side of the Atlantic. In fact, while the S&P 500 has rallied handsomely, it has been very hard to find opportunity elsewhere in the world.
So what markets are the worst right now and which ones should be avoided? Well, here are the five worst ETFs in the world year-to-date, based on the dozens of country-based funds in the iShares universe, and the risks they face for further declines.
China ETF
Click to Enlarge YTD Return: -15%
No surprise here. The iShares China Large-Cap ETF (FXI) is down more than 15% year-to-date thanks to continued weakness in China data, particularly in the manufacturing sector.
Top holdings include China Mobile (CHL), China Life Insurance (LFC) and oil giant CNOOC (CEO) — all of which are significantly in the red this year despite a big rally in the U.S. stock market.
China’s GDP continues to fade, with previous forecasts moving down to the 7% range — and the growth rate could be the slowest there since 1999 if those targets hold or move lower.
And at the end of June, Credit Suisse hinted that China’s GDP growth could start with the number 6 when all is said and done … so if you think the recent declines should be a buying opportunity in this China ETF, think again.
Turkey ETF
Click to Enlarge YTD Return: -15%
The iShares MSCI Turkey ETF (TUR) is also off 15%, but for very different reasons than China.
Turkey was once the darling of the eurozone outlook, with a reasonably brisk growth rate and high hopes for full membership in the monetary union that would make it a boon to trade partners in the EU — not to mention a model of how progressive Muslim countries to the south of Europe can become part of the region’s economic engine.
But now a weakening currency and political unrest have upended Turkey, and there’s no sign of the dust settling anytime soon.
Few top components of this Turkey ETF are directly accessible via American exchanges, but major telecom Turkcell (TKC) is — and its 9% decline year-to-date is pretty representative of the trouble in the region.
South Africa
Click to Enlarge YTD Return: -17%
The iShares MSCI South Africa ETF (EZA) is down nearly 17% so far in 2013, and it is closely tied to China because of the commodity connection these two nations share.
South Africa is one of the more developed regions on the continent but doesn’t really have enough of a service or technology sector to offset its high dependence on the mining industry.
And thanks to strikes at major miners on the continent coupled with plummeting commodity prices, it remains highly unlikely that South Africa’s economic woes are going to reverse.
The International Monetary Fund just slashed South Africa’s economic growth forecast to 2% for 2013 from a 2.8% outlook in April, and as growth forecasts continue to decline for China, you can expect that to further sap demand for commodities and mining stocks in South Africa.
Energy and chemicals giant Sasol (SSL) is a top component in the South Africa fund and one of the few stocks that is accessible on American exchanges. It has hung in there with 7% gains year-to-date — underperforming, but at least in the green. The same can’t be said for the other top components of EZA.
Chile
Click to Enlarge YTD Return: -21%
The iShares MSCI Chile Capped ETF (ECH) is off 20% year-to-date, thanks in part to slowing exports in this emerging market — particularly in regards to commodities.
Chile investments saw brisk growth in past years thanks to a lack of opportunity elsewhere and a big influx of capital. However, that has led to some inflation fears — and coupled with a slowdown in China that has ruined commodity demand for many regions, it has been a tough road for Chile in 2013.
Top components including battery maker Enersis (ENI) and financial stock Banco Santander (SAN) are off by double digits year-to-date thanks to trouble in the region.
Chile’s central bank still expects modest growth in 2013 — about 4% to 5% when all is said and done — but expectations were much higher and investors shouldn’t expect this decent expansion to translate into profits.
Brazil
Click to Enlarge YTD Return: -21%
Slightly harder-hit than Chile is Brazil and its iShares MSCI Brazil Index ETF (EWZ). That’s because expectations were even higher, and the disappointment has been even more severe now that the ugly inflation beast has battered a once-booming consumer class.
Brazil is dependent on commodities, particularly energy exports, and so the tale of China’s slowdown applies here. But the reason that Brazil has been even harder-hit is that inflation is clocking a roughly 6% annual rate and gutting investment and consumer confidence — the bright spots that led to impressive growth in previous years.
Throw in the struggles at major commodities corporations like oil giant Petrobras (PBR) and mega-miner Vale (VALE) and you understand why things are ugly. In 2012, Brazil’s GDP grew by just 0.9%, the slowest in three years, and 2013 is shaping up to be only marginally better.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
