Country ETFs, are they a good investment?
Are country ETFs worth an investment? In which international markets is the current valuation attractive, which markets are currently overvalued?
Diversifying your investment portfolio across various countries is essential for risk management. By allocating assets internationally, you can mitigate the impact of localized economic downturns and achieve more stable returns over time. Such geographical diversification taps into differing market cycles and growth opportunities, allowing for the exploitation of emerging markets’ potential alongside the stability of developed economies. Furthermore, cross-border investments open the path to innovations and sectors unique to certain regions, thus broadening the investor’s exposure to global technological advancements and trends.
In this article we will provide measures for current market valuation, risk profiles per country, and provide information on wether we would invest in country ETFs – and if so, in which ones. We first take a look at developed countries and then on developing countries:
We use the following metrics for our analysis. As Country ETF investing is more long-term oriented, we provide either historic performance data on a 3 or 10 year (Yr) perspective. For maximum drawdown, price-to-book and -earnings we provide the current values (March 2024):
Price-to-earnings (PE): Compares the price to the relative earnings of all companies in the index.
Price-to-book (PB): Compares the price to the relative book value of all companies in the index.
Sharpe Ratio (SR): If the value of the Sharpe ratio is 1, that means the investment is making a higher return than a risk-less investment for every unit of risk taken. If the Sharpe ratio is 0, the investment is making the same return as a risk-less investment for the level of risk involved.
Value at Risk (VaR): Value at Risk at a 95% confidence level is a measure that tells you the maximum relative amount of money you could lose on an investment with 95% certainty. In other words, there is a 5% chance that you could lose more than the VaR value.
Conditional Value at Risk (CVaR): The CVaR is a measure of the average loss magnitude once the VaR level has been breached. It measures the average of all losses that exceed the VaR level.
| Number of Stocks | Max Drawdown | 10Yr performance | PE | PB | SR 3Yr | SR 10Yr | VaR @ 95% | CVaR @ 95% | |
|---|---|---|---|---|---|---|---|---|---|
| MSCI World | 1465 | -57.5 | +10% | 22.6 | 3.5 | 0.3 | 0.6 | -1.6 | -2.5 |
| Switzerland (EWL) | 45 | -51.7 | +6.3% | 17.9 | 3.7 | 0 | 0.3 | -1.7 | -2.7 |
| Japan (EWJ) | 218 | -60.4 | +7.2% | 17.3 | 1.7 | 0.1 | 0.3 | -2.1 | -3.0 |
| USA (SPY) | 610 | -54.9 | +13% | 27 | 5 | 0.3 | 0.6 | -1.8 | -2.9 |
| Canada (EWC) | 87 | -60.3 | +5.7% | 17 | 2.1 | 0.1 | 0.2 | -2.0 | -3.3 |
| United Kingdom (EWU) | 83 | -63.4 | +2.9% | 12.7 | 1.9 | 0.1 | 0.1 | -2.0 | -3.2 |
| Australia (EWA) | 58 | -65.0 | +4.7% | 19.4 | 2.5 | 0 | 0.1 | -2.1 | -3.4 |
| Germany (EWG) | 56 | -68.2 | +3.4% | 16 | 1.6 | -0.1 | 0.1 | -2.4 | -3.7 |
| Korea (EWY) | 99 | -71.4% | +22.5% | 23.0 | 1.2 | -0.5 | 0.1 | -2.8 | -4.3 |
Overall, country ETFs are not the best investment tool when looking for high returns. For many country ETFs the Sharpe-Ratio is <1 and for some countries such as Germany even below 0. This means, that returns have been low in relation to the amount of investment risk taken. Among the country ETFs, however, we believe that the MSCI world has the best balance between reward and risk. S&P 500 investors have performed better in the past, but the valuation is a bit higher compared to the MSCI World ETF.
Above only developed country ETFs are shown. How does this look for developing countries? Lets compare them using the same metrics. The ETFs seem to perform better when only looking at the 10Yr average performance, however, the drawdowns are also much higher compared to the developed country ETFs. Furthermore, the Sharpe-Ratios are either negative, or close to 0, suggesting that the higher reward comes with increased risk. India for example has a high Sharpe-Ratio, but as the PE and PB ratios are much higher compared to other countries, careful comparison of the ETF composition is essential.
| Number of Stocks | Max Drawdown | 10Yr performance | PE | PB | SR 3Yr | SR 10Yr | VaR @ 95% | CVaR @ 95% | |
|---|---|---|---|---|---|---|---|---|---|
| MSCI Emerging Markets | 1376 | -65.1% | +15.9% | 15.9 | 1.8 | -0.5 | 0.1 | -1.8 | -2.8 |
| India (INDA) | 136 | -72.7% | +18.4% | 26.4 | 4.1 | 0.6 | 0.4 | -2.4 | -3.8 |
| Indonesia (EIDO) | 22 | -74.8% | +22.3% | 16.1 | 2.3 | 0.4 | 0.0 | -2.7 | -4.3 |
| China (MCHI) | 519 | -50.3% | +22.8% | 14.8 | 1.6 | -0.8 | 0.1 | -2.2 | -3.5 |
| Mexico (EWW) | 24 | -64.4% | +22.9% | 16.5 | 2.3 | 0.7 | 0 | -2.4 | -3.7 |
| South Africa (EZA) | 32 | -63.4% | +29.4% | 12.8 | 1.6 | -0.3 | -0.1 | -2.9 | -4.2 |
| Brazil (EWZ) | 49 | -75.8% | +33.7% | 8.1 | 1.5 | 0.1 | 0 | -3.3 | -5.0 |
Several investors at the beginning of their investment journey hear about the 70/30 portfolio (70% MSCI World ETF, 30% Emerging Markets ETF). This is said to improve the performance and increase the Sharpe-Ratio. Yes indeed it does, but the improvement of 0.03 points for the Sharpe-Ratio and around 1% higher performance is marginal. For passive investors who value their time higher than potential return, this might be a good strategy.
