Do Corrupt Countries Make For Great ETFs?
Eric Dutram: Corruption has unfortunately risen by leaps and bounds and has become an undeniable reality today. In some countries, it is found at a very high level while in others it remains in the shadows. Unfortunately, this corruption not only raises insecurity in any society but also hampers the potential return on both foreign and domestic investments.
Every investor, before making a foreign investment, should consider the level of prevailing corruption in a country, as it can influence the performance of the product to a large extent. It may so happen that the country follows anti-corruption regimes but is highly corrupted. Even the developed economies have issues regarding corruption.
In order to quantify perceived levels of corruption, investors can look to Transparency International, an organization which studies corruption in global markets, and recently issued its latest annual Corruption Perceptions Index. The organization marks countries on a scale of zero to 100. In its latest report on corruption, the organization included 176 nations.
“A country or territory’s score indicates the perceived level of public sector corruption on a scale of 0 – 100, where 0 means that a country is perceived as highly corrupt and 100 means it is perceived as very clean. A country’s rank indicates its position relative to the other countries and territories included in the index, according to Transparency International.
The latest annual report has assigned rank 1 to Denmark, Finland and New Zealand, which have scores of 90 each. This means that according to Transparency International, these are the least corrupt countries. Featuring among the most corrupt countries are Afghanistan, North Korea and Somalia, and other basket case nations with little government protections.
Investors should note that Canada has found a place in the top 10 of the least corrupt countries for six years in a row. This time around, Canada is ranked ninth, while it is joined by the entire Scandinavian bloc to round out the top ten.
Not surprisingly, in the European Union, Greece was cited as the most corrupt. Considering the European continent at large, Ukraine is ranked 144, the worst country in the continent when it comes to corruption.
Yet while investors might think that corruption would drag on stock performance, this hasn’t exactly been the case in some markets this year. Instead, even with heavy corruption, some ETFs tracking these regions which have done well.
Below are highlighted some country-specific ETFs that have shined in spite of coming out poorly on the corruption score:
MSCI Mexico Investable Market Index Fund (NYSEARCA:EWW)
This iShares ETF follows the Mexican market by tracking the performance of the MSCI Mexico Investable Market Index. Mexico which has been placed at the 105th position in the list has been given a score of 34. It has slipped from last year’s rank of 100, indicating that the corruption level has increased from last year.
Political corruption and drug trafficking have been major issues in Mexico. Bribery in government contracts has been also an epidemic.
Mexico recently has issued a new Federal Law against Corruption in Public Procurement which applies to Mexican and non-Mexican corporations and individuals. The law prohibits bribery and other action intended to achieve an unlawful benefit in the procurement of public contracts with the Mexican federal government (read Best Latin America ETFs for 2013).
Despite a high level of corruption in the country, EWW delivered a return of 35% over a period of one year.
MSCI Philippines Investable Market Index Fund (NYSEARCA:EPHE)
The Philippines has also been assigned a rank of 105 with a score of 34, making it another high corruption perception nation. Still, this is an improvement from a ranking of 129 last year as procurement and budget reforms issued by the government in the year led to the improvement in ranking (read Philippines ETF: a Rising Star in Emerging Market Investing).
The Philippines government expects to make its reforms and procurement more stringent in the coming years and promises good governance going forward. “We see this as an affirmation of the efforts to strengthen institutions, provide deterrents against corrupt practices, and hold accountable those who have used power for personal gain,” Presidential Spokesman Edwin Lacierda said.
To tap into the Philippines, investors have EPHE which delivered a very solid return over the last one year period, gaining more than 45%. The fund also ranks favorably with the Zacks ETF Rank so it could be poised to outperform in 2013 as well.
Global X FTSE Greece 20 ETF (NYSEARCA:GREK)
As we highlighted earlier, Greece is the most corrupt region in the European Union and has been assigned a rank of 94. This is even below the newer democracies such as Bulgaria and Romania, and marks a slide for the country which was ranked 80 in 2011.
Tax evasion is the major issue in Greece which enraged the nation’s masses. It is believed that the wealthy in the country often evade government taxes. They are said to have accounts in Swiss banks and other offshore accounts, further adding to the nation’s woes.
Despite tracking a country which is deep in recession for five consecutive years and is also one of the most corrupt, the fund delivered a year-to-date return of 16.8%. However, the country’s problems stretch beyond corruption so investors could see some weakness in this ETF starting in 2013 (see Greece ETF: Still Defying All Odds).
MSCI Thailand Investable Market Index Fund (NYSEARCA:THD)
THD tracks the MSCI Thailand Investable Market Index. The fund has a score of 37 and has been ranked 88 on the corrupt country list. Last year it was assigned a rank of 80 and has since fallen from there.
The downgrade is mainly attributable to the political system of Thailand. The country has its share of corruption, bribes, lackeys and privileged clients. If the bureaucracy, at the highest level, is not made more accountable and transparent, the tentacles of corruption can never be loosened.
Despite the situation, the fund posted a gain of 33% over a period of one year.
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