ETFs for the Six Markets Above 2007 Highs

Most investors aren’t exactly anxious to discuss the recent performance of their portfolios after the worst recession in a generation wiped out as much as 70% of some asset classes. But on the whole, the last 15 months have given investors plenty of reasons to smile, as global equity markets staged an impressive comeback in the final three quarters of 2009 to reclaim much of the ground lost on the way down. When the calendars turned to 2010, investors were cautiously optimistic that the recovery would continue into the new year, bringing equity benchmarks back to pre-recession levels and rewarding those investors who had the patience to stick with a buy-and-hold strategy and avoid “panic selling”.

But escalating concerns of a debt crisis in Europe and lack of any job creation in the U.S. have dealt fresh blows to global equity markets, putting the psychologically important “breakeven point” further out of reach. Most equity markets are well below the highs touched prior to the financial crisis broke loose in 2007, but some have managed to complete the recovery process and head even higher. “While most of the world’s stock markets are still trading well below their highs of 2007, a handful has bucked the trend,” writes Nesil Staney. According to Staney, only six stock markets are in positive territory since 2007, none of them among the world’s developed economies.

That fact pattern “demonstrates just how much investors have been favoring emerging markets, and the extent to which they have been willing to delve into frontier markets.”

U.S. markets join their developed counterparts deep in the red. The S&P 500 SPDR (SPY), which offers investor’s exposure to the S&P 500, is down about 30% from its 2007 high. The Dow Jones Industrial Average ETF (DIA) is down about 27%, and even the PowerShares QQQQ has lost about 22%. Those figures are downright impressive compared to some of the members of the Europe Equities ETFdb Category; the iShares MSCI Spain Index Fund (EWP) is down about 45% from its 2007 high.

For investors with the ability and willingness to take on additional risk, there are several ETFs offering exposure to the emerging and frontier markets that have bucked the trend and climbed above their pre-crisis levels. According to Staney, the six stock markets in positive territory include three Latin American markets–Venezuela, Chile, and Colombia–as well as Tunisia, Sri Lanka, and Indonesia.

Three of those countries (Tunisia, Sri Lanka, and Venezuela) aren’t accessible through U.S.-listed ETFs, reflecting the extent to which investors have gone off the beaten path in search of promising investment opportunities. Below, we highlight ETF options for the other three markets in this exclusive club:

• Global X/InterBolsa FTSE Colombia 20 ETF (GXG): This ETF’s holdings consist of the 20 most liquid stocks in the Colombian market. Boosted by a rising middle class and strong local consumption, GXG has gained about 20% this year, making it the top performer in the Latin America Equities ETFdb Category by a fairly wide margin. Like many Latin America ETFs, GXG is tilted towards financials and energy stocks; these two sectors account for about 60% of assets.

• iShares MSCI Chile Index Fund (ECH): Chile serves as an excellent example of the economic benefits of fiscal prudence. The Chilean government refused to spend lavishly when copper prices skyrocketed earlier this decade, electing instead to pad coffers for a rainy day. When the global downturn hit, Chile was able to quickly and easily implement massive stimulus plans without damaging its long-term fiscal health through extensive borrowing. ECH has about 30 individual holdings, although the top ten account for nearly three quarters of total assets. Energy (27%), consumer goods (14%), and industrial materials (12%) account for the largest sector weightings.

• Market Vectors Indonesia Index ETF (IDX): This ETF tracks the Market Vectors Indonesia Index, a benchmark consisting of companies that are domiciled and primarily listed in Indonesia, or that generate at least 50% of their revenues in Indonesia. IDX has about 30 individual holdings, maintaining tilts towards the financials (25%) and industrials (20%) sectors. Until recently, IDX was the only ETF offering pure play exposure to Indonesian equities; that changed when iShares introduced the MSCI Indonesia Investable Market Index Fund (EIDO) in May.

As noted above, three of the six markets with their heads above water aren’t accessible at all through U.S.-listed ETFs. Assets in the four funds highlighted above (including EIDO) total less than $700 million, demonstrating that most investors have missed out on the few relatively bright spots in global equity markets over the last two-plus years.

Disclosure: No positions at time of writing.

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