There are number of problems to be aware of with regional ETFs.
Regional ETFs make sense as a way of allocating your investments if you believe you can spot the growth regions or see parts of the world that you would like to avoid, and, in particular, if you think you can pick regions better than sectors.
I'd say that for developed equity markets the case for straightforward regional ETFs is weaker than for developing ones. Not only is there easier access to individual stocks through American or Global Depositary Receipts and a better choice of country-specific ETFs but investors could also target companies of a particular size, such as a European small-cap fund, or select a different styles or index methodologies.
Emerging market ETFs
The prospects for emerging markets are repeated so often that it begins to seem as if it's self-evident, even the word 'emerging' seems self-fulfilling.
Nevertheless, every assumption needs to be tested. Taking the 21 months to the end of September (admittedly quite a short period) emerging market equities have done slightly better than developed ones according to the MSCI indices. However, both have declined by more than 20% even after the whopping index gains of 2009. For UK investors, the mediocre performance of emerging markets through 2008/9 has been partly disguised by the fall in the value of sterling.
When it comes to the choice of emerging market ETFs that UK investors can buy, the present situation is not encouraging.
Expense ratios for these ETFs are relatively high with none less than 0.65% a year. In addition, there are problems with relatively thin trading volumes and some of these ETFs having very low assets under management and shares currently trading a premium to NAV.
iShares MSCI GCC ex-Saudi (LSE: IGCC), for example, tracks the handful of countries in the Gulf Cooperation Council with the exception of Saudi Arabia. But it only has assets under management of $7m and trades at premium of nearly 2%. Like many regional ETFs, it is concentrated on just one country. In this instance, Kuwait makes up 48% of its value.
This problem is particularly serious in the case of ETFs tracking the MSCI Emerging Latin America sub-index, such as iShares MSCI Latin America (LSE: LTAM), where roughly 70% of the market cap is accounted for by Brazil. In these circumstances, I reckon it make more sense to avoid the region or research the Brazilian economy and decide to invest in a Brazil country ETF on that basis.
Not surprisingly, these regional indices are also heavily weighted to a very few sectors, with the financial sector nearly always occupying first or second place.
One particular complicating factor is the dollar index currency. Investors' currency exposure is really to the currencies the individual stocks are quoted in rather than the dollar. So a Latin American ETF would give you plenty of exposure to the Brazilian Real rather than the dollar.
Asian/Far Eastern ETFs
For this region there are two regional ETFs available: db X-trackers MSCI Emerging Asia TRN (LSE: XMAD) and iShares MSCI AC Far East Ex-Japan (LSE: IFFF). Both are heavily weighted towards Chinese and South Korean stocks (Chinese weighting is around 29% for both ETFs) but the main difference is the sizable proportion (16%) of the former is accounted for by Indian stocks.
Specifically Chinese tracker funds tend to be skewed by investing only in shares listed in Hong Kong -- e.g. Lyxor China Enterprise (LSE: LCHN) -- or a mixture of these and what are known as red chips, companies with large government owned stakes -- e.g. iShares FTSE/Xinhua China 25 ETF (LSE: FXC).
Both these China ETFs are tracking quite narrow indices that may not reflect the best performance of the Chinese economy. However, iShares MSCI AC Far East Ex-Japan lists 99 Chinese companies (that is to say ones incorporated in the People's Republic) out of a total of 403, which suggests that the coverage is actually superior to that of the dedicated country ETFs. With just under a billion pounds in assets, a price spread of 0.3% and trading at a premium to NAV of just 0.36%, it looks like a good option for investing in the Far East.
db X-trackers MSCI Emerging Asia TRN tends to have higher spreads and to trade at much higher premium or discount to its next asset value (a current discount of 2.5%). For a fund of its size ($545 million in assets) trading looks rather thin. It could even the case that investors and market makers (Deutsche Bank and Banca IMI) are finding it difficult to work out the prices of its 483 index constituents.
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