ETFs have become popular among all walks of investors in part because of the granularity of exposure available; U.S. investors are able to access nearly every corner of the world through a single security. Before the advent of country-specific ETFs, many investors spread out their portfolios around the globe through broad-based global funds or stock of large multinational corporations that had their shares listed on American exchanges. However, now investors can buy a wide variety of companies domiciled in a particular country easily and cheaply thanks to ETFs. Currently, there are well over 30 countries that have an ETF tracking their national market, with many more in the pipeline.
While these ETFs have been instrumental in diversifying many investors portfolios in terms of geographic exposure, there are some nuances of which investors should be aware. The vast majority of these funds generally focus on one of three sectors; financials, industrial materials, or energy. A great example of this high level of concentration can be found in the most popular Australia ETF, the iShares MSCI Australia Index Fund (EWA). The fund allocates 46.1% of its assets to the financials sector and a further 24.4% to industrial materials; it has just 0.6% combined in the software and hardware sectors. However, this condition does not afflict just EWA; many other popular country ETFs have a similar breakdown. The Peru ETF (EPU) has about 54% of assets in industrial materials, while the Spain ETF (EWP) has 43% in financials. While this allocation pattern is not necessarily a bad thing, it highlights the importance of taking a look under the hood before buying. Below, we profile three country ETFs that might be able to offer investors seeking international exposure in a more high-tech oriented portfolio (see Warning: Five Country ETFs Focused On Financials).
iShares MSCI South Korea Index Fund (EWY)
Not surprisingly, the ETF covering the dynamic technological leader of South Korea has a large allocation to tech sectors. EWY allocates 22.8% of its portfolio to the hardware sector with a 4.5% allocation towards telecommunication firms. The vast majority of this allocation to the tech sector comes from a large weighting to Samsung Electronics, which comprises 18% of the fund, by far the largest single holding (see more information on EWY’s holdings here). EWY, which charges an expense ratio of 0.63%, is down almost 8% thus far in 2010 (see Fears Of Second Korean War Weigh On EWY).
iShares MSCI Netherlands Index Fund (EWN)
A surprising country with a large allocation to technology sectors is the Netherlands. EWN offers investors a 16.5% allocation towards hardware and a 8.6% allocation to telecommunication companies by following the MSCI Netherlands Investable Market Index. Additionally, the largest sector in the fund is consumer goods, which tends to be underrepresented in country specific ETFs (see EWN’s fact sheet). In terms of individual holdings, Unilever makes up 16.9% and this is, followed by Phillips Electronics which comprises 11% of assets. Like many funds in Europe, EWN is down on the year, posting a loss of about 17% (see Europe ETFs All Over The Board).
iShares MSCI Taiwan Index Fund (EWT)
One country that has made a name for itself based on its technological prowess is Taiwan. EWT offers one of the highest allocations to the hardware sector out of any country ETF on the market, allocating about 43% of its assets to the sector. Additionally, the fund allocates just 6.7% to industrial materials and 0.8% to energy, an extremely low level compared to many other country specific ETFs (see more information on EWT’s holdings page). In terms of its individual holdings, EWT is dominated by Taiwan Semiconductor (14%), and electronic manufacturing giant Hon Hai Precision Industries (9%). For more ways to play the Taiwan economy, see IndexIQ Launches Small Cap Taiwan ETF.
For investors seeking more of an emerging market play or for those seeking “pure play” exposure to technology related companies, Global X China Technology ETF (CHIB) may be an interesting choice. The fund tracks the S-BOX China Technology Index, which is designed to reflect the performance of the technology sector in China. The fund has a heavy allocation towards telecommunication companies, which make up about half of total assets, followed by large allocations towards software (16.6%), and hardware (15%) sectors as well. Some of its top individual holdings include internet search company Baidu and Ctrip.com (see fundamentals of CHIB here).
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Disclosure: Eric is long EWA.