Foreign ETFs: Beyond BRIC
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Much has been made about the BRIC countries and even I wrote an article on them before. Their economic potential is not to be trivialized. However, it is always prudent to look for the next article-friendly batch of countries that can be packaged into an acronym.
Risks to consider are that these countries are potentially even more unstable than the BRIC countries. They also have the same path ahead of them at least in broad strokes. There are so many stumbling blocks, and so many ways the countries can shoot themselves in the foot. On the other hand, countries like the United States and Spain can shoot themselves in the foot as well. However, the potential in this new wave of emerging economies is greater than that of the United States or Spain. Though, Spain does have the chance to reinvent itself and start a massive economic boom, but do not bet your savings. I do not mean to sound overly political, but it is important to understand that even developed economies can be unstable. Emerging economies have so much potential they cannot be ignored.
The same solution to the BRIC countries risks are applicable here. To insulate your portfolio from the damage that can be done by less than scrupulous companies or other similar situations ETFs are the way to go. They allow you to diversify away those risks, and it gives you the expertise of a dedicated team to do your research and make the choices. Few people have the time or expertise to vet foreign companies. There are not much choice when it comes to ETFs for these countries.
I do not know if Turkey will ever be allowed into the European Union, but at this point why would they want to be. Regular bilateral trade treaties work just fine. Turkey is one of the fastest growing economies in the world. However, it is not an unstable and backward place. It actually has an effective government. I would at least argue that it is as good as or better than India's. There are some tensions, but what government does not have one. I think the worry about Islamist political parties is slightly overblown. There is also nothing that prevents a Muslim country from being an economic powerhouse. Turkey grew by over 8% in 2011. Check out Turkey's economic highlights here.
Turkey is basically developed, but it is still one of the world's emerging economies. Those definitions are always vague and sometimes skewed in favor of the old imperialist countries. I say that loving empires, because sometimes I miss Rome. Turkey is probably the safest country on this list. The ETF for Turkey is iShares MSCI Turkey Investable Mkt Index (NYSEMKT: TUR), which tracks the Turkish equity market. The ETF will protect you from company specific risks and is up over 38% year to date. That does not mean it is too expensive, since it tracks the economy, you look at the country not the ETF. If Turkey is headed for recession, then sell or wait, otherwise it has room to run. Also, recession for those economies means a lower growth rate. For the US or EU nations, recession means no growth or negative growth.
Peru has a huge mining industry. It is the number one exporter of gold in Latin America. It also has copper, phosphate, etc. There are also agricultural products that it exports. It is a stable country that has been growing its economy over the last few years. Right now they focus on trade, which is a fantastic way to build an economic base. The next step would be for Peru to focus on creating businesses. Instead of just exporting based materials it needs more finished goods and services. So far though it has navigated the economy well and there is no reason to assume it cannot continue.
Latin America is somewhat of an ignored growth story. So much focus has been put onto Asia, but Latin America has its merits too. It is not revolutionary to focus on Latin America, but everything outside of Brazil is given only passing notice. Peru is one of the stronger countries in Latin America, though there are others. The ETF for Peru is iShares MSCI All Peru Capped Index (NYSEMKT: EPU) and is up over 15% for the year.
Thailand is an export driven industrialized economy. It is among the new nations to rise to prominence. It has numerous political issues, but is fairly stable. The economy has a good foundation, but growth is very low. Thailand still has a lot of ground to make up. Its per capita GDP leaves something to be desired. Most of the population is still employed in agriculture, but the wealth comes from industry. There are many facets to the industrial base as you can find on the link above. I chose Thailand over Indonesia for a Southeast Asian country, because I feel that Thailand is a bit more stable with a little less internal strife. The border with Myanmar is a problem, but Indonesia has so many more internal problems.
Southeast Asia is not anything new. Thailand has been in the news due to the supply chain disruptions due to flooding. People are aware that Thailand has a role to play in the world economy. However, there is still a lot of potential in the economy, and it will take time to grow. The ETF for Thailand is iShares MSCI Thailand Invest Mkt Index (NYSEMKT: THD). Despite slow GDP growth this ETF is up over 25% for the year.
There are so many emerging economies out there. As each find their comparative advantage they will grow. Investors in the developed world need emerging economies to diversify their portfolios and capture global economic growth. However, there are problems with any emerging economy such as too little regulation. ETFs are massive enough that they dilute the risk, and provide expertise in managing the portfolio of countries. I do not like multi-country ETFs, because they tend to be heavily invested in the obvious choices. Instead look for the countries with massive potential that are not yet making huge headlines. Many people know about Turkey, but I do not see articles lauding Turkey like they were China and India a few years ago. ETFs focusing on those countries are a great way to make sure your choice of the successful countries is respected. Always look beyond the developed world for gains, because it is a great way to offset the lag of established economies.
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