Never underestimate the ability of financial institutions to come up with an ETF for every occasion. I’m seriously waiting for “Jumbo’s Clown Car Circus Act ETF,” which is when I know we’ve hit the max.
While perusing the latest list of ETFs, my eye was drawn to country-specific ETFs, which give you access to the best (and worst!) possible investments one can make in the market.
I say that because many developed countries are hard at work producing shareholder value with numerous companies pushing the human experience forward. Alas, there exist many countries where the companies themselves may be great, but the nation has a tradition or reputation for corruption.
That can filter down to corporate culture, as well. For example, a friend who has produced some films in China tells me that theater managers skim money from admissions, but the government requires them to report good numbers … so they do.
That said, we don’t throw the baby out with the bathwater. A pair of country-specific ETFs offer a lot of promise right now: the iShares MSCI Ireland Capped ETF (EIRL) and the iShares MSCI Hong Kong ETF (EWH).
Let’s look at those … and because I feel it’s worth it to warn investors, we’ll also look at the dangers of another country ETF, the SPDR S&P Russia ETF (RBL).
iShares MSCI Ireland Capped ETF (EIRL)
The EIRL is booming. It has little to do with leprechauns, of course, and more to do with the fact that the country emerged from Europe’s financial crisis in a good place. While Europe struggles at 2% GDP growth, and the U.S. seems to be contracting again, the European Commission expects GDP growth of 3.5% this year.
I like ETFs because they offer a lot of diversity, though that’s where I have to point out one particular caveat with the EIRL: There aren’t a ton of publicly traded Irish companies, so there’s not a huge amount of diversity in this fund. EIRL holds just 29 stocks currently, and the top 10 holdings make up nearly three-quarters of the asset base.
Twenty-two percent is invested alone in CRH plc (CRH), which is basically a massive building materials manufacturer crossed with Lowe’s (LOW), since it runs 174 DIY stores in Europe. There’s nothing wrong with CRH — it’s a vibrant business — but it just has an outsized say in how the ETF performs.
That said, the outsized say has been good. CRH is up 17% year-to-date; the EIRL is up about 16%. All told, EIRL has doubled since 1010, and it recently broke into new highs.
EIRL charges 0.48% in fees, or $48 annually for every $10,000 invested.
iShares MSCI Hong Kong ETF (EWH)
EWH is the largest Hong Kong ETF, and it has been around for 19 years.
As one of three big financial centers in Asia, it’s no surprise that you’ll find 73% of the EWH’s assets are invested in real estate and finances. Otherwise, you’ll get about 10% in utilites, 7% in consumer discretionary stocks, 6% in industrials … and not much else.
Still, the mix has done well for the ETF, with returns of 13% YTD, 40% for the three-year period, and 52% over the past five years.
The primary holding here is AIA Group Ltd. (AAGIY), which accounts for 18% of assets. It’s a $78 billion financial behemoth, and handling insurance is its primary line of work.
There’s plenty of growth still left in this part of the world. Still, the key with this ETF is to set a trailing stop-loss about 10-12%, as a global financial crisis or scare could take this ETF down suddenly and sharply.
That’s the problem with country ETFs — there isn’t as much diversity in the fund, and both local and regional issues can stab you in the back.
EWH also charges 0.48% in expenses.
Areas to Avoid
If you’re asking, I’d completely run away from the Middle East. The rise of ISIS is going to destabilize the region for some time. Also stay away from Africa and China, as there’s too much risk of corruption.
And I also would stay away from Russian ETFs, such as RBL.
For starters, corruption is rampant. I’ve met too many Russian businessmen who made fortunes over there explicitly by working the system, who came here to protect their ill-gotten gains. That’s not to say that there aren’t honest Russian CEOs and great Russian companies. I just don’t want to take the risk, and neither should you.
Take a look also at the chart. It’s not just that returns are poor — mostly stoked by poor energy prices — but there’s way too much volatility to boot.
If you’re going to invest in energy (which you’re essentially doing by buying the RBL), at least put the situation in your favor by investing in Exxon Mobil (XOM). With XOM, you not only get Exxon’s excellent worldwide operations and dividends, but it’s also an indirect play in Russia — at some point, when sanctions are lifted, you can profit from XOM’s exploration efforts there.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long LOW. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.