An introduction to Country-Based ETFs

What is a Country-Based ETF?

A Country-Based ETF is an ETF that invests specifically in foreign-based securities of another country. This may include equities, fixed income or other asset classes; however, the securities must be based in another country.

They are an effective way of investing in different countries and geographic locations as well as gaining more specific factor and sector exposures.

Within each country, ETFs can drill down further into different styles and exposures of investing. For example, within each country, there can be an ETF for each factor or sector. Investors can invest in a large-cap Japan ETF, or a small-cap China ETF, or a Brazilian Technology ETF.

Why invest in Country-Based ETFs

ETFs allow investors to gain customized exposures to different investments based on their market views. ETFs also have the benefits of greater liquidity, low costs, and high transparency. This has spurred an increase in demand for the use of ETFs, and in response, there are many more opportunities available from ETF providers.

Investors can now play different specific countries and asset classes based on their views. For example, if an investor has a strong view that the Indian market is primed for explosive growth and would like to gain exposure to Indian equities, they may easily purchase an Indian equity Country-Based ETF. 

It’s no secret that some developing markets are growing much faster than developed markets, such as the U.S., and investors may want to spread their capital into these higher-growth countries in order to spur investment and reap a return. Geographies such as China, India, and Latin America are considered higher growth areas – albeit with higher corresponding risk - that many North American investors may want to tap into.

It is also important to note that there is a broad use of these ETFs, including passive investment, speculative trading, tactical asset allocation, hedging, and top-down rotational strategies. These uses can apply to both individual retail investors and seasoned institutional investors.

The main benefits of Country-Based ETFs include increased international portfolio diversification at a lower cost, as well as optimizing tracking error, and in a more tax-efficient manner than investing in passive open or closed-end country-based investment funds.

Examples of Country-Based ETFs

Given the broad number of countries in the world, there are many different ETFs that investors may gain exposure to. However, investors must consider the heightened geographical risk of some of these countries. Furthermore, other countries may be more difficult to invest in, increasing the expense ratios of foreign ETFs. Lastly, these ETFs may be more thinly traded than those of developed markets such as the U.S., and therefore liquidity is a key consideration as well.

Some examples of Country-Based ETFs are as follows:

MCHI (iShares MSCI China ETF)

• AUM: $8,559M
• YTD performance: -10.9%

EWJ (iShares MSCI Japan ETF)

• AUM: $9,456M
• YTD performance: -20.5%

INDA (iShares MSCI India ETF)

• AUM: $3,983M
• YTD performance: -13.9%

EWU (iShares MSCI United Kingdom ETF)

• AUM: $3,721M
• YTD performance: -10.9%

EWY (iShares MSCI South Korea ETF)

• AUM: $2,917M
• YTD performance: -26.8%

Data for this article is as of July 5th, 2022.