U.S. investors looking to make a bet on companies in Kazakhstan or Qatar are getting help from an exchange-traded funds industry that is increasingly adding single-country ETFs to their offerings.
About 30 new single-country ETFs came to market last year focusing on markets ranging from the United Arab Emirates to China. That brings the total to 202 single-country ETFs with $97.2 billion assets in the United States.
Focusing on a single market overseas can carry risks and requires monitoring. Government restrictions can limit the supply of securities available to U.S. fund managers, and the funds’ pricing can be unpredictable because they can trade all day on U.S. exchanges while the markets they track are closed.
As a result, the ETF prices don’t always match the value of their underlying assets, as they do in traditional mutual funds that price once a day.
Premium and discount trading in international ETFs is the result of a simple timing issue. Once an overseas market closes, say Japan, the value of the underlying Japanese assets stay the same, while the U.S.-listed ETF keeps trading. That means that for most of the U.S. trading day, the U.S.-listed Japanese ETF is trading based on expectations of how the underlying market is going to perform the next day.
A 1 or 2 percent premium or discount is not alarming on a typical trading day, but a surprise economic policy announcement or unforeseen event could make those premiums double or triple, analysts said.
U.S. investors also have to consider currency exchange rates given the stronger dollar, which can cut into total returns generated in weaker local currencies abroad.
Investors have been turning to currency hedged ETFs, which strip out the effect of a region’s currency on the performance of a given fund. The difference can be substantial. The iShares Currency Hedged MSCI Germany ETF, for example, has had a 22 percent YTD return so far in 2015, compared to a 7 percent YTD return for the unhedged iShares MSCI Germany ETF.
Government restrictions in overseas markets, such as taxes or limits for offshore investors, can also add a layer of uncertainty to single-country funds as they can create a prolonged period of trading at a premium. That’s because a surge in investor demand in an ETF that can only create a limited number of shares a day may cause a fund to diverge from the true value of its underlying assets.
Ashley Lau writes for Reuters.