Eric Dutram: The global financial turmoil severely tested the mettle of many a developing economy. While many proved their resilience, challenging the foundation of many mature economies, others were stretched considerably to survive the crisis.
With an improving global outlook and some countries gaining strength in 2012, there were many country-specific ETFs delivering double-digit gains to the investors.
The markets in 2013 started on a great note with many country ETFs beginning the year with a bang. In this context the Vietnam ETF has turned out to be a surprise package for investors. Market Vectors Vietnam ETF (NYSEARCA:VNM) has returned over 23% in the year-to-date period, and could continue with its solid performance going forward.
However, there are some countries which failed to impress from the very start. Below we are highlighting three such nation ETFs which have disappointed investors this year:
South Korea, Asia’s fourth largest economy and one of the most stable, showed its strong resilience to the global turmoil and turned out to be one of the best performing regions in 2012 (South Korean ETFs: Best Way to Play Asia?).
However, in the New Year, when the other economies gained strength, South Korea gives the impression that the economy may be lagging somewhere. The ETF tracking the region had a poor start to 2013.
South Korea’s housing market is facing a difficult time and could be headed for a bit of trouble thanks to unfavorable demographics. The property market appears to be pinned down by many structural tribulations like an aging population and retiring baby boomers on top of the low-growth environment.
The economy which was already facing troubles from the Euro-zone crisis due to poor exports has been made more vulnerable by the rising won. This makes exports even more expensive. Also, with a depreciating yen supported by economic reforms in Japan, the situation is further aggravated as Japan comes into direct competition with the nation (South Korea ETF Investing 101).
In this sluggish growth environment, ETFs tracking the region are bound to deliver negative gains to an investor. iShares MSCI South Korea Index Fund (NYSEARCA:EWY), which offers a broader exposure to South Korean equities, ended 2012 at a solid gain of 19.9% (Top Ranked South Korea ETF in Focus).
However, in 2013, the ETF just does not appear to be in good shape as revealed by its year-to-date negative return of 8%.
The fund provides exposure to 106 South Korean stocks while investing $3.2 billion in the portfolio. The volume levels are seen at more than 1 million shares a day.
Samsung plays a very dominant role in the fund’s performance as the fund has assigned a healthy 21.6% of its asset base to the company. Samsung continues to gain ground in the smartphone business and is in neck-to-neck competition with Apple’s iPhone in terms of sales.
Attributable to rising demand for Samsung products and Apple’s earnings miss, the company continues to gain strength (3 Apple Proof ETFs).
Despite Samsung’s solid performance in the near term, the ETF does not seem to be in top form. Other top positions have been allocated to Hyundai and Posco. The fund charges an expense ratio of 61 basis points.
Among sector allocation, Information Technology, Consumer Discretionary, Financials, Industrials and Materials get double-digit allocation in the fund.
Labor unrest and strikes in the mining and transportation industry of South Africa continue to hamper its growth prospects and its currency, the rand. Resource-rich South Africa is arguably the world’s largest producer of precious metals and likewise its currency, the rand, is regarded as a commodity currency exhibiting high volatility (Time to Exit South Africa ETF?).
Due to a protracted strike in the mining industry, the country’s economic output and its growth, which has already been impacted by the Euro-zone crisis, come into limelight again. The mining industry makes up for 60% of the country’s exports which implies that the country’s growth in highly dependent on the segment.
The curtailed output in the mining industry also leads to a higher trade deficit which again puts a question on the country’s currency prospects. Apart from this, a high unemployment rate in the country also remains a major concern as it currently stands at 24.9%.
In such a scenario, iShares MSCI South Africa Index (NYSEARCA:EZA) turned out be one of the worst performing country ETFs to start the year. The fund has delivered a negative return of 5.7% year to date.
EZA is one of the main sources to play the South African economy and provides exposure to 51 securities. The fund manages an asset base of $506 million and charges investors 61 basis points in fees annually.
At 17.68%, EZA allocates a hefty proportion to the Mining sector occupying the third position in sector allocation after Financials (26.6%) and Consumer Discretionary (17.7%) (Top Mining ETFs in Focus).
The fund also has not been able to do much in minimizing the stock-specific risk as nearly 55% of the asset base goes towards the top ten holdings. Among individual holdings, MTN Group, Naspers and Sasol occupy the top three positions in the fund.
Malaysia is one of the regions which showed its resilience to the global slowdown attributable to increased private consumption and investment. Private consumption and investment recorded growth of more than 20% in the first three quarters of the year.
Despite healthy domestic demand and an improving prospect for GDP growth in 2013, Malaysian ETFs have not found it easy this year.
The primary reason behind this underperformance is political concern looming large on Malaysian equities. The market has weakened on the speculation that Prime Minister Najib Razak’s and his party will face a more uncertain outcome for this year’s upcoming election.
This led to a fall in prices of Malaysian equities which consequently affected the performance of the Malaysian ETF. iShares MSCI Malaysia Index Fund (NYSEARCA:EWM) which provides exposure to 43 securities dived down 5.1%, turning out to be one of the worst performing country ETFs to start the year (Malaysia ETF: the Perfect Emerging Market Fund?).
The fund manages an asset base of $887.4 million and charges a fee of 51 basis points. The fund has a concentrated bet on the top ten holdings as 54.1% of the asset base goes towards them.
Among sector holdings, the highest weighting go to Financials with 30.6% of asset base invested in it. Industrials, Telecommunication, Consumer Staples and Consumer discretionary also get double-digit allocation in the fund.