Investing in Specific Countries With ETFs

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The world is a private investor's oyster thanks to a wide range of ETFs that make it easy to invest in different countries' stock markets.

Investing in Specific Countries With ETFs When the legendary Sir John Templeton first encouraged US investors to put money into overseas markets in the 1950s, global investing was in its infancy.
 
The majority of investors kept their equity investments to their home market. For any brave investors who did look further afield, overseas investing meant using active fund managers like Sir John Templeton – or the even more daunting prospect of buying shares in foreign companies.
 
All told, investing overseas was costly and potentially complicated.
 
But today things are very different.
 
The explosion in Exchange Traded Funds has brought us hundreds of ETFs that track indexes in all the major (and many minor) countries around the world.
 
These ETFs enable you to put your money to work in different countries easily and cost effectively, with just a few clicks at your broker.
 
And with ETFs there's far less risk than investing in individual foreign-listed shares, since your money is spread across all the companies in the index the ETF follows.

 

A tourist's guide to ETFs

There are several reasons to consider country-specific ETFs. You might believe an economic recovery or a change of leadership in a country could herald strong returns for its stock market, for example, and hence want to invest there.
 
Country-specific ETFs also enable active investors to back their hunches on the fortunes of particular sectors. Australian and Canadian ETFs can be a play on commodities, for instance.
 
However most of us invest overseas to diversify our portfolios, and here country-specific ETFs can be an attractive option.
 
While global and regional ETFs are available that give you exposure to many different countries at once, the benchmark indices can be tracked more cheaply on a country-by-country basis.

For instance, an ETF that tracks the US S&P 500 can cost just 5 basis points (0.05%) a year to own.
 
Similarly, the UK FTSE 100 can be held for 7 basis points in annual charges, and the German DAX index for 8 basis points.
 

Cheapest ETFs on the major stock markets

Country Index No. of constituents Annual fee for the cheapest ETF
USA S&P 500 500 0.05%
United Kingdom FTSE 100 100 0.07%
Germany DAX 30 0.08%
Japan Nikkei 225 225 0.09%
Source: justETF.com; As of 09/04/15

Such ETFs enable you to assemble a portfolio that's spread across the world's major stock markets for a very low annual cost.
 
 

Know your index

As ever with ETFs, you should understand what index is being tracked by the different country-specific ETFs on offer in order to make sure you choose one that's right for your needs.
 
There are usually many different broad and more specialist indices covering the stock market in the major countries.
 
These indices typically vary in terms of the number of constituents and the size of the companies included, but they may also differ more fundamentally, such as in how they weight different companies in the index, or by vetting companies based on dividend yield.
 
For example, the iShares UK Dividend UCITS ETF aims to track the FTSE UK Dividend+ Index. This offers exposure to the 50 highest yield UK stocks, which is reflected in the ETF's relatively high dividend yield.
 
The two big index providers – FTSE and MSCI – provide indices for all the major countries and are widely used by country-specific ETFs.
 

MSCI indices on the major stock markets

Country Index No. of constituents Annual fee for the cheapest ETF
USA MSCI USA 628 0.07%
United Kingdom MSCI UK 109 0.25%
Germany MSCI Germany 54 0.25%
Japan MSCI Japan 314 0.25%
Source: justETF.com; MSCI.com; As of 31/03/15

Generally ETFs tracking the FTSE indices are cheaper, while the MSCI ones are more broadly diversified.
 
Our investment guides with easy access to fund factsheets and index factsheets should make your research a breeze.

 

Currency risk

It's important to consider currency risk when investing overseas.
 
Currency risk is the possibility of the currency of the country you're investing in falling or rising compared to your own.
 
For instance, when you own US shares and the US dollar falls versus the pound, the value of your US shares will diminish in pound terms.
 
Note that you will be exposed to currency risk even if the ETF you are buying is denominated in pounds. It's the denomination of the underlying assets that counts, since it’s their value that determines the value of your investment.
 
One way to avoid currency risk is to buy an ETF that tracks a hedged index designed to offset currency fluctuations.
 
For example, you can compare hedged and unhedged ETFs for Japan using the justETF search tools.
 

Comparison of a sterling hedged and unhedged Japan ETF

 
Source: justETF.com; As of 07/12/16; Calculations in GBP


A world of opportunity

Country-specific ETFs can help you to build a cost-effective global portfolio at a very keen price – fewer than 10 basis points in annual costs for the likes of the US, UK, Germany, and Japan.
 
These ETFs also enable you to cherrypick individual emerging countries, or to focus on specific themes within a country such as small cap shares or income.
 
justETF's investment guides offer a great starting point for researching ETFs focussed on the most popular countries.