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Building portfolios with country ETFs

Special to The Globe and Mail

The explosion in the number of exchange-traded funds over the past decade presents new opportunities for investors. Single-country ETFs (SCETFs) are a case in point. They can be used to add foreign diversification to portfolios in lieu of broadly based international funds or individual stocks.

There is plenty of choice: Approximately three dozen (and counting) SCETFs now trade on U.S. and Canadian exchanges. Examples are the iShares MSCI Mexico (EWW-NYSE), BMO India C$ Hedged (ZID-TSX) and iShares China Large Cap (FXI-NYSE) ETFs.

One benefit of SCETFs is that they allow for rebalancing at lower levels of aggregation - enabling asset allocations to be more finely tuned to risk preferences. For example, an investor holding an ETF tracking Japanese stocks would be able to sell units and lower exposure to the soaring Japanese market.

Second, if a portfolio has a broad-based international fund, SCETFs could be used to tilt toward stocks in particular countries. In other words, the weighting pattern embodied in the international fund can be modified to an investor's preferences.

Third, SCETFs provide scope for applying investing approaches at the country level. For example, value investors might be interested if a stock market in a country sells off sharply, while growth investors could be intrigued by cyclical and secular growth prospects in other countries.

Three country ETFs to put on the watch list:

Turkey is one of the countries that have had a sharp selloff in its stock market recently. The iShares MSCI Turkey ETF (TUR-NYSE) is down about a third over the past three months. Political and social turmoil on the social front is to blame, compounded by fears over Turkey's high debt load.

Its economy retains the same potential as before so a return to calm on the home front could be a tonic for the market. But it was on a tear before the crisis and valuation is still lofty - in fact, above the average for the MSCI All Country World Index.

Look to Russian stocks for the best value, advises Dave Garff, a specialist in SCETFs at Accuvest Global Advisors in California. They are trading at a price-earnings ratio near five, the lowest of all the foreign markets he follows.

The Russian market has a high (45 per cent) exposure to the oil and gas sector, and there are concerns about the protection of shareholder rights. A revaluation may depend upon higher oil prices and/or a more investor-friendly environment. A recommended ETF is the Market Vectors Russia Trust (RSX-NYSE).

Poland might not be terribly cheap but could be of interest to growth investors. It's the only member of the European Union to dodge the region's recession, so far. One ETF option is Market Vectors Poland (PLND-NYSE). The government recently announced a package of stimulus measures that could deliver a cyclical boost to the economy.

This column first appeared on

© 2007 The Globe and Mail. All rights reserved.

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