Among Developed Market ETFs, Singapore And Hong Kong Crush The Competition

by on November 20, 2010 | ETFs Mentioned:

As the world’s three key developed market zones–the U.S., the EU, and Japan–continue to struggle under the weight of mounting debt burdens, high unemployment, and slow growth environments, investors have made a rapid exodus out of “advanced” markets and into emerging markets that now account for the majority of global GDP growth. These nations generally have far better prospects for economic expansion thanks to low debt loads, growing populations and favorable demographic shifts, and consumers who are eager and able to spend. While replacing developed markets with emerging markets has been the reaction for many investors, this strategy overlooks some of the world’s smaller but rapidly-expanding developed markets that have either capitalized on immense resources wealth or technological know-how to thrive when many of their counterparts are sputtering. Countries such as Sweden, Australia, and Canada have all seen relatively good years thanks to strong commodity exports and relatively stable fiscal footing, while counterparts in the U.S. and EU struggle to overcome countless economic obstacles.

While these three economies have all posted robust gains on the year when compared to more sluggish markets in the euro zone or Japan, their rates of expansion are downright anemic when compared to the twin developed cities of the Pacific: Singapore and Hong Kong. Despite a general lack of natural resources that has positioned other market to ride the commodity boom, these two tiny markets have managed to capitalize off of their technological prowess and strategically important locations in order to remain relevant in an increasingly globalized world. So far in 2010, the two main ETFs tracking these developed markets have been among the best performers on the market, while posting similarly robust levels over the past 52 week period. This contrasts sharply with funds targeting other developed markets, even those that have weathered the storm better than most: Australia’s main fund is up just 6.1% year-to-date while Canada has seen gains of just 8.1% in comparison [also see Five ETFs For An Asia-Centric World].

With commodity prices tumbling across the board, this trend could very well continue well into 2011, as these two tiny markets seem poised to show continued strength thanks to their status as shipping, technological, and financial hubs of their respective regions. Tourism has also improved in both cities, as the countries capitalize off of rising consumption levels in neighboring countries to bring in tourist dollars to the cities’ restaurants, hotels, and casinos. Thanks to these growing advantages, as well as extremely high levels of economic freedom, the two regions remain destinations not only for capital, but immigrants as well, which could help to maintain advantages over surging rivals in Kuala Lumpur or Shanghai. For investors who believe that these markets are likely to continue to crush the competition and provide portfolios with outsized returns, we profile some of the most popular ways for investors to increase allocations to these dynamic Asian developed markets [see our free Country Exposure Tool]:

To invest in the Singaporean market via ETFs, the iShares MSCI Singapore Index Fund (EWS) remains the best option, although investors can achieve double digit exposure to the island nation through a variety of funds [see all the ETFs that offer exposure to Singapore here]. EWS offers allocations to 32 different securities with heavy weightings going towards the financial (45%), industrial material (14%), telecom (12%), and consumer goods (11%) sectors. Besides its top individual holding in Singapore Telecommunications (11%), the fund’s next top three holdings are all in banking firms that have managed to hold steady despite crises in a variety of other developed market banking sectors [read Can Anything Stop The Singapore ETF?].

For Hong Kong, investors would probably be best served by looking at the iShares MSCI Hong Kong Index Fund (EWH), which tracks the MSCI Hong Kong Index. Much like its Singaporean counterpart, EWH is heavily focused on financials, which make up over half of the fund’s total assets. The next most popular sectors include utilities (12%), and business services (8%). EWH holds 42 securities in total while charging a modest expense ratio of 52 basis points, putting it at the low end of ETFs in the China Equities ETFdb Category.

For investors seeking exposure to the real estate market of Hong Kong, the Guggenheim China Real Estate ETF (TAO) could make for an interesting option. This ETF tracks the AlphaShares China Real Estate Index, which is designed to measure the performance of publicly-traded companies and REITs deriving a majority of their revenues from real estate development, management and/or ownership of property in China or China’s SARs. The fund offers heavy exposure to Hong Kong real estate; REITs on the island make up over 70% of the fund’s total assets including all of TAO’s top five holdings. While the fund from Guggenheim hasn’t been able to match the returns of its broader iShares counterpart–posting gains of juts 12.5% year-to-date–the ETF has managed to surge in recent months gaining 29% in the latest half year period [also read Three Real Estate ETFs To Watch If The IMF Is Right].

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Disclosure: No positions at time of writing.