Single-country exchange-traded funds for major economies such as China or Japan can make up part of a core allocation, but the single-country ETFs for smaller nations are being used for tactical bets.
Take the iShares MSCI Netherlands ETF (EWN), for example. This ETF has $176 million in assets under management and year-to-date inflows of about $10 million—a fair chunk of money, considering the fund’s size.
Heidi Richardson, head of investment strategy for U.S. iShares, attributes the swell in inflows to investors seeking a position ahead of the Dutch prime minister election on March 15. Normally, the election of a prime minister from a country of 16.8 million people wouldn’t gather much international attention. However, this year’s top candidates included the centrist incumbent Mark Rutte against a hardline populist, Geert Wilders, known informally as the Dutch Donald Trump.
With the surprises from the U.K. Brexit vote and the U.S. presidential election, along with the possibility of populists winning national elections this year in France and Germany (and possibly in Italy if an election is called there in 2017), investors may be using these single-country ETFs to place short-term bets on where individual countries are headed.
“I think when it comes to some of the smaller countries like the Netherlands or Italy, or something [similar], people are being very tactical in terms of their views," Richardson says. "To play the barometer of the popular sentiment in the Netherlands, they could be buying the EWN as a way to express that view.”
EWN has a broad-based index of Dutch companies such as Unilever, Heineken and ING. The ETF has done well so far this year, up about 11 percent. The expense ratio is 0.48 percent. EWN saw a brief downtick ahead of the March 15 election before continuing its rally.
So far EWN is outperforming the much larger and broader iShares MSCI Eurozone ETF (EZU), which is up 7.6 percent and has $8.2 billion in AUM. A little more than 60 percent of that ETF is dominated by France and Germany, with the Netherlands coming in third at around 11 percent.
Richardson says larger registered investment advisors are using single-country ETFs to build country models where they overweight or underweight certain nations, using these products as a way to take advantage of policy changes and other reforms going on in certain countries.
Using single-country ETFs is not for everyone. While EWN has about a 30 percent tilt to consumer staples, many single-country ETFs are as much a play on sectors as they are on countries. One example is the iShares MSCI Russia Capped ETF (ERUS), where the bulk of holdings are focused on energy companies. Heavy sector weightings in single-country ETFs can be a factor no matter the size of the country, Richardson says.
“A lot of them are closet sector funds in some ways. Many of the Asian ones are loaded up with financials or technology,” she notes.