It's important to note that this factor can work in both directions. During the past year, for example, investments in Japanese stocks have been aided by a strengthening yen while returns to Brazil ETFs have been partially eroded by a slumping real.
5. State Owned Companies
When the U.S. government took on ownership stakes in several large banks and a behemoth auto manufacturer a few years back, it was major news. But in many countries, big government stakes in companies is not the least bit out of the ordinary.
Many international equity ETFs have big weightings afforded to companies that are partially state-owned, a distinction that is not immediately obvious from viewing a list of holdings. The presence of the government as a major shareholder can be a red flag to investors, since it introduces the possibility that the company will be operated in a way that is not in the best interests of its shareholders at all times.
The iShares FTSE China 25 Index Fund (FXI) consists almost entirely of companies in which the government has a major ownership stake, as do a number of other China ETFs. But it isn't only emerging markets where the government has been known to maintain a significant ownership stake; this is fairly common in some European countries as well. For example, Eni SpA makes up about 22% of the iShares MSCI Italy ETF (EWI). The Italian government owns a 30% golden share in the company, which could be problematic if the cash crunch in Italy continues and the government becomes desperate to raise capital [see Three Long/Short Ideas For Euro Zone Debt Drama].
Michael Johnston is a senior analyst at ETFdb. ETFdb offers a comprehensive and orignal ETF database and analytical consulting services for advisors and investors, as well as a free newsletter. Learn more about their services by visiting ETFdb.com. Disclosure: ETFDb had no positions in the securities named in this article at time of writing.