Wednesday 27 June 2012

Single Country International ETFs

We're going to look at individual country ETFs today. These can sometimes throw up opportunities with higher returns than holding larger core funds. Obviously they are riskier so you would require a decent premium over a larger fund but they can help diversify your portfolio if the country in question isn't covered by one of your main larger funds. For instance if you had a main European fund and an All Country Asia fund then investing in a single country fund for Brazil might be a good idea as it's not covered by either of your main funds.

Below gives a table for the calculations we used to analyse the funds. For some funds (marked with a *) the dividends are not distributed so we have used dividend data for funds tracking the same index from etfdb.com.


Country
Ticker
Price
Net Yield
TER
Adjustment
Growth
Total Return

Australia
SAUS.L
1617
5.08%
0.59%
0.00%
4.13%
8.62%
*
Poland
SPOL.L
1184
5.39%
0.74%
0.00%
3.95%
8.60%
*
Brazil
IBZL.L
2700
4.55%
0.74%
0.00%
4.28%
8.09%

Taiwan
ITWN.L
1922
4.29%
0.74%
-0.24%
4.58%
7.89%

UK
ISF.L
557
3.97%
0.40%
-0.62%
3.20%
6.15%

China
FXC.L
6149
2.66%
0.74%
-2.59%
6.75%
6.08%

South Africa
SRSA.L
2004
2.97%
0.74%
-2.06%
4.03%
4.20%
*
Netherlands
IAEX.L
2442
3.20%
0.30%
-1.69%
2.58%
3.79%

Japan
IJPN.L
584
2.46%
0.59%
-2.97%
3.43%
2.33%

Canada
SCAN.L
1687
2.21%
0.59%
-3.49%
3.58%
1.71%
*
Italy
IMIB.L
675
4.02%
0.35%
-0.56%
-1.80%
1.31%

Russia
RUSS.L
1438
1.73%
0.74%
-4.67%
4.48%
0.80%
*
Turkey
ITKY.L
2047
1.85%
0.74%
-4.35%
3.88%
0.64%

USA
IUSA.L
857
1.81%
0.40%
-4.45%
3.63%
0.59%

Mexico
SMEX.L
1477
1.36%
0.65%
-5.81%
4.33%
-0.77%
*
Korea
IKOR.L
2203
1.30%
0.74%
-6.02%
4.38%
-1.08%

India
NFTY.L
1176
0.61%
0.85%
-9.51%
6.05%
-3.70%
*

All these funds trade on the London Stock Exchange but similar funds are available in other international markets. The majority of the about funds track MSCI indexes, apart from the UK, Italy and China that track FTSE indexes and USA and India that track S&P indexes.

The adjustment is based on a fair value dividend yield of 4.5% (funds with net yields below this will need to discount their price to bring them in line with a fair valuation, funds with yields higher are not adjusted)

The growth rate is based on 50% of IMF forecast real GDP growth for the country for the next 2 years. An inflation expectation of 2.5% a year is added to give a nominal growth rate.

Total Return is simply the yield minus the TER plus the adjustment rate and growth rate. The chart below displays the data graphically:




Four countries stand out as looking particually attractive; Taiwan, Brazil, Poland and Australia.


Taiwan



Fairly negative price action at present having just broken its 100 day low.


Brazil



A similar story here, only more aggressive recent falls.

Poland



A longer downtrend for this one. Looks like it might be bottoming out soon.

Australia



Surprise, surprise. Pretty much the same as the others. Maybe more correlated with Taiwan than the other 2 which would make sense given their proximity to China.

Of the four funds above I would feel safest investing in Australia. It's clearly the most developed and being the 13th largest ecomony in the World by GDP it's a fairly well sized country. Having said that Spain is the 12th largest economy and I would feel wary of investing there. I would say Australia is a different situation with greatly differing prospects. It's rich in natural resources and land and is a growing country. It's closeness to China is also appealing and the Australian economy appears fairly strong with government debt at around 20% of GDP (compared to 85% for the UK, 100% for USA and 200% for Japan). MSCI Australia is financials heavy making almost 47% of the index, materials making up 23% (by comparison the UK FTSE100 index is only 18% financials). Given this MSCI Australia might not be an attractive investment if you already hold some individual financial companies and MSCI Taiwan might be a better alternative with less than 15% financials and more technology heavy with 55% of holdings in this sector.

1 comment:

  1. I like the Australia fund too but I have a few niggling worries:

    1) The housing bubble in Australia (as the fund is heavy in financials)

    2) The currency risk, I'm no Forex expert, but I remember when we got AU$3 to the pound. It's more like $1.50 now and on par with the US$

    But like you say there are plenty of positives too:

    1) It's currently about 25% off its recent peak (a decent discount for any developed market)

    2) Growth and current valuations (as outlined in your post)

    3) I'd consider retiring in Australia in my old age so some exposure to its stock market for me is probably a good thing

    ReplyDelete