I hypothesize that retail investors don’t spend much time considering country-specific exchange traded funds (ETFs) to buy.
I don’t have empirical data to back up this assertion. However, it seems logical that most smaller investors are looking to get more bang for their buck. For example, why buy three or four country-specific emerging markets ETFs when you can cover more ground by investing in the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM).
EEM invests in more than 1,240 mid and large-cap emerging market stocks across 27 countries. All this for 0.68% in annual fees. It’s easy and relatively cheap compared to what you would pay for active management.
Warren Buffett recommends that most investors invest in a low-cost S&P 500 ETF or mutual fund and call it a day. I don’t want to put words in the man’s mouth, but my guess is that if you asked him whether you should buy EEM or three or four of the hottest country-specific ETFs, he would suggest the former because of its diversification.
However, here at InvestorPlace, my job when writing about a collection of stocks or ETFs is to push the envelope. It’s not always a good idea to lead with the most common-sense approach. Sometimes, it’s about having some fun with our readers.
With that in mind, I’ll come up with seven country-specific ETFs to buy for 2022, three of which were poor performers over the past year — a bit of the “Dogs of the Dow” approach — and four that ought to do well in 2022.
- iShares MSCI Canada ETF (NYSEARCA:EWC)
- SPDR S&P China ETF (NYSEARCA:GXC)
- Ark Israel Innovation Technology ETF (BATS:IZRL)
- iShares MSCI Chile ETF (NYSEARCA:ECH)
- iShares MSCI South Africa ETF (NYSEARCA:EZA)
- iShares MSCI Turkey ETF (NYSEARCA:TUR)
- Franklin FTSE Taiwan ETF (NYSEARCA:FLTW)
I’ll exclude the U.S. in my selections. I’ll also keep the individual fees below 1%, passive or active.
Country ETFs to Buy: iShares MSCI Canada ETF (EWC)
As country-specific Canadian ETFs go, EWC is the industry leader with $3.9 billion in total net assets. The ETF tracks the performance of the MSCI Canada Custom Capped Index, which means no single company in the index can account for more than 22.5% of the portfolio.
It also means that it can only have 24% of the index invested in companies with individual weightings greater than 5%. The index is rebalanced quarterly to fix either issue.
If you’ve researched Canadian stocks, you’re aware that most ETFs are heavy into financials and energy stocks. EWC is no exception. Financials have a 37.8% weighting and energy stocks are second-highest at 14.2%. That’s 52% combined.
In 2021, EWC had a total return of 27%. That was a more than five-fold increase in its annual performance from the year before.
Energy stocks had a lot to do with this performance. For example, the iShares S&P/TSX Capped Energy ETF — it trades on the Toronto Stock Exchange (TSX) — had a 2021 total return of 83.7%. Of course, the year before, it was down 34.5%.
Financial stocks also had an excellent year in 2021.
The BMO Equal Weight Banks Index ETF — it also is listed on the TSX — tracks the performance of the Solactive Equal Weight Canada Banks Index, which is the five largest Canadian banks weighted equally. It had a total return of 39.4% in 2021.
Do I think both sectors will deliver a repeat performance in 2022? I do not. That said, the Canadian economy continues to deliver reasonable growth. I doubt that will slow in the year ahead. However, any political difficulties south of the border will hurt Canada’s businesses.
It’s something to keep in mind over the next three years leading up to November 2024.
SPDR S&P China ETF (GXC)
Seeking Alpha has a list of country ETFs and their performance year-to-date and over the past year through Jan. 6. Five have returned -20% or worse over the past year. I’ve selected three poorly performing country ETFs from different regions: China, Turkey, and Chile.
GXC tracks the performance of the S&P China BMI Index, a collection of Chinese businesses available to foreign investors. They are weighted according to their float-adjusted market capitalization. The index is rebalanced quarterly and reconstituted once a year in September. This allows for IPOs from the previous 12 months to be added to the index.
The ETF has 883 holdings at the moment with a weighted average market cap of $122 billion and a 3-5 year earnings per share (EPS) growth rate of 13.9%.
If you look at the ETF’s top 10 holdings — Tencent Holdings (OTCMKTS:TCEHY) and Alibaba (NYSE:BABA) account for almost 20% — most of the names were hurt by the Chinese government’s regulatory crackdown in 2021. However, many of them rebounded nicely in December as officials there admitted that a slight easing of its policies made sense in the year ahead.
For example, BABA’s total return over the past month was 8.2%. Over the past decade, GXC had seven positive annual returns and three negative. The up years averaged 19.6%, while the down years averaged -14.8%.
These figures suggest you’ll do well in the long run and the ETF only charges 0.59%.
Country ETFs to Buy: Ark Israel Innovation Technology ETF (IZRL)
One of the media’s favorite punching bags in 2021 was Cathie Wood, the founder, and chief executive officer of Ark Invest. Her investment firm makes big bets on innovation disruptors. In 2021, things went to proverbial ratshit.
It seems no one has anything good to say about the portfolio manager.
As a contrarian at heart, I couldn’t possibly go with the iShares option when the great underdog story in 2022 could be told with Wood’s IZRL ETF. Launched in December 2017, it has a little more than $235 million invested in the ETF, which tracks the Ark Israel Innovation Index, a collection of Israel companies causing disruption innovation in several sectors. The top three are: technology (49.2%), health care (27.9%), and industrials (11.7%).
Unlike a lot of country ETFs on this list, IZRL skews smaller. The 76 holdings have just 5.7% allocated to stocks with market caps above $10 billion. The average market cap is just $889.8 million, well below anything else discussed in this article.
Although passive in nature, the index and ETF do a good job diversifying. The top 10 accounts for 20% of the portfolio. So, 66 stocks are allocated across a total weighting of 80%.
Down 3.6% in 2021 after two consecutive years of decent years in 2019 and 2020, IZRL looks ready to rebound in 2022.
iShares MSCI Chile ETF (ECH)
2021 wasn’t a great year for for Latin American stocks.
The iShares Latin America 40 ETF (NYSEARCA:ILF), which invests in 40 of the largest companies by market cap in the region, declined 13.5% in 2021. And ILF invests in the creme de la creme in Latin America.
The ETF provider’s Chile fund tracks the performance of the MSCI Chile IMI 25/50 Index, a collection of small, mid, and large-cap Chilean companies. The 25 represents the maximum weighting of a single control group. The 50 represents the maximum percentage of individual stocks weighted at 5% or more. Like EWC, it is rebalanced quarterly to adjust either capping rule.
Because the ETF is investing in a region that can be economically and politically unstable, the turnover is 62%, quite high for a passive investment. However, despite the turnover, it only charges 0.57% annually. There are many passive U.S. ETFs that charge more.
I’ve always been a sucker for Latin American businesses. This iShares ETF invests in 25 Chilean enterprises, with the top 10 accounting for 68% of the portfolio’s $431.0 in total net assets. One of my favorite stocks amongst the 25 is Falabella. It operates retail, grocery, and home improvement stores, along with banking, real estate, and e-commerce operations.
Unfortunately, it trades on the Santiago Stock Exchange. It currently trades at 0.58x sales, half its five-year historical average. It’s an excellent value play at the moment. If you buy ECH, you don’t have to worry about it not trading on a U.S. exchange.
Here’s an additional plus: Chile has the fourth-highest fully-vaccinated population in the world at 87%. That ought to become even more meaningful in 2022.
Country ETFs to Buy: iShares MSCI South Africa ETF (EZA)
You would not have gotten rich over the past decade owning EZA. It has a 10-year annualized total return of 1.32%. The ETFs best annual return in the past decade was 36.0% in 2017.
However, South Africa is due for a stock boom. Analysts appear ready to jump on the bargains.
“We have a positive outlook for South African equities in 2022, expecting double-digit returns,” said Jonathan Kennedy-Good, a Johannesburg-based analyst at JPMorgan Chase (NYSE:JPM). “Above-trend GDP growth and still low — albeit gently rising — rates in South Africa should help equity returns. A weaker rand should boost off-shore earnings over domestics.”
EZA tracks the performance of the MSCI South Africa 25/50 Index, which is a collection of mid and large-cap South African stocks. The ETF currently owns 38 stocks.
Naspers (OTCMKTS:NAPRF) is the largest holding with a 13.3% weighting. The next largest holding is FirstRand (OTCMKTS:FANDF) at 7.8%. Naspers is a multinational with big interests in publishing and the internet. FirstRand is a bank holding company.
One of my favorite South African companies is Remgro (OTCMKTS:RMGOF). It is a holding company with interests in banking, packaging, mining, food, beverages, and personal care products. It owns 32% of Distell Group (OTCMKTS:DSTZF), Africa’s leading producer of alcoholic drinks. In November, it received a buyout offer from Heineken (OTCMKTS:HEINY) that values it at 40.1 billion South African Rand ($2.55 billion).
I expect EZA to come alive in 2022.
iShares MSCI Turkey ETF (TUR)
TUR had a total return in 2021 0f -27.5%. Over the past 10 years, its annualized total return is -4.9%. You could have bought almost any S&P 500 stock 10 years ago and done better than the iShares MSCI Turkey ETF.
That’s not surprising given the reckless policies of Turkish President Recep Tayyip Erdogan. In recent months, he’s lowered interest rates at a time when inflation in Turkey is off-the-charts high.
Hopefully, in 2022, Erdogan will see the error of his ways and work on lowering the country’s inflation.
In the meantime, TUR invests in 49 Turkish companies whose average market cap is $2.2 billion. Almost 56% of the ETFs $291 million in total net assets are invested in mid-cap stocks. The top 10 holdings account for 52% of the portfolio. Except for a couple of names, I don’t think most investors will be familiar with most of the companies in the top 10.
Worst case scenario: you use the ETF to learn more about Turkey’s business community.
Country ETFs to Buy: Franklin FTSE Taiwan ETF (FLTW)
In an effort to make this article less of an advertisement for iShares country ETFs, I went with the Franklin Templeton ETF, which tracks the performance of the FTSE Taiwan Capped Index. It has $46.92 million in total net assets. By comparison, the iShares version has $7.3 billion. FLTW tracks the MSCI Taiwan 25/50 Index.
The Franklin ETF has 106 holdings, 17 more than its competitor. The weighted average market cap is high at $143.5 billion. Approximately 78% of the stocks in the portfolio have a market cap of $10 billion or more.
Unlike the Turkey ETF, most investors would be familiar with many of the names in its portfolio. The largest position is Taiwan Semiconductor Manufacturing Co. (NYSE:TSM) at 20.7% or one-fifth of the ETF.
As TSM goes, so goes FLTW. The same applies to the iShares version. It has a weight of 22.9%.
Performance-wise, FLTW has delivered five-star long-term returns. Since its inception in November 2017, it has had an annualized return of 16.7% through the end of November 2021.
As non-U.S. ETFs go, FLTW is one of the best country-specific funds available to investors. Out of all the other ETFs to buy on this list, I wouldn’t hesitate to own this one as a big part of your international holdings.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.