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11/13/2012 7:32:40 PM
There are some key differences when it comes to the indexing process for U.S.-focused broad market ETFs and those funds that offer exposure to other countries. Namely, an ETF such as the SPDR S&P 500 (NYSE: SPDR) or the PowerShares QQQ (NASDAQ: QQQ ) can be benchmarked to an index many investors are already familiar with.
When it comes to international ETFs, those funds are rarely linked to the marquee index in that country. For example, the iShares FTSE China 25 Index Fund (NYSE: FXI ) is not benchmarked to the Shanghai Composite or any other well-known China index for that matter. FXI, the largest China ETF by assets, tracks an index provided by FTSE Group and scores of other ETFs that track global markets do so by using MSCI (NYSE: MSCI ) indexes.
This scenario creates an interesting situation under which investors can find themselves owning an ETF that is lagging the benchmark index in a particular. Or, better yet, investors can become involved with a global ETF that tracks an index that outperforms the major bourses in that country. Here are a few examples of some ETFs that have been doing just that this year.
iShares MSCI Mexico Investable Market Index Fund (NYSE: EWW ) Despite some post-U.S. election declines, there is no ignoring the iShares MSCI Mexico Investable Market Index Fund's stellar 20.2 percent year-to-date gain. EWW's bullish ways are all the more impressive when considering the Mexican Bolsa IPC Index is up "just" 10.8 percent, according to Bloomberg data .
If there is a knock on EWW, it is certainly not its inability to outperform the broader Mexican equity market. Rather, it would be noticeable tracking error with its own index. Over the past year, the MSCI Mexico Investable Market Index is up 14.3 percent while EWW is up 12.5 percent, according to iShares data . A gap of 1.8 percent is far wider than EWW's 0.73 percent tracking error since inception.
iShares MSCI Philippines Investable Market Index Fund (NYSE: EPHE ) The Philippines PSEi Index has soared almost 25 percent this year. On its own, that is not too shabby, but it pales in comparison to the almost 38 percent delivered by the iShares MSCI Philippines Investable Market Index Fund. EPHE's narrow focus (the ETF holds just 41 stocks) is one reason the fund has outperformed the broader Philippine market.
The PSEi Index makes room for energy and materials names, but those sectors combine for barely more than two percent of EPHE's weight. In 2012, EPHE has been one example of an ETF with excessive weight to financial services stocks that has thrived. That sector accounts for over 38 percent of EPHE's weight, but in the Philippines, that means more than just bank stocks. EPHE's exposure to financials includes property developers and holding companies. Property developers have provided a spark to Philippine equities this year, benefiting EPHE along the way.
iShares MSCI New Zealand Investable Market Index Fund (NYSE: ENZL ) Like EPHE, the iShares MSCI New Zealand Investable Market Index Fund's narrow focus has helped the ETF outpace its home market. The lone New Zealand ETF holds just 23 stocks and the top two holdings represent a third of the ETF's weight.
If those stocks, Fletcher Building and Telecom New Zealand ( NZTCY ), falter, ENZL would be exposed. However, that is not what is happening this year as ENZL is up 27.5 percent, including dividends paid. That means the ETF is 625 basis points of ahead of the New Zealand Exchnage Gross 50 Index.
And speaking of dividends, ENZL has a 30-day SEC yield of 4.26 percent.
For more on ETFs, click here .
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