Three Country Exchange Traded Funds Offer Potential For Investors
Country exchange traded funds (ETFs) that invest in specific countries’ stocks offer a way to gain exposure to foreign equities, according to Investopedia. The funds can include alternative investments, foreign currencies and commodities.
Three such country ETFs have demonstrated strong uptrend over a long term but have experienced recent pullbacks, providing an opportunity to get in before the next upside wave begins. This obviously assumes the uptrend will continue, but in these cases, signs of weakness have been small.
iShares MSCI Taiwan Capped ETF (EWT)
iShares MSCI Taiwan Capped ETF (EWT) has been steadily rising all year. In June, shares hit a 52-week high, and shares were up roughly 38.7% from their 52-week low price of $26.38 per share.
After hitting a high of $37.49 on Aug. 8, the price fell near $36. If the price rallies above this mark, traders should consider a purchase. At the same time, if the price falls in the short term, traders could consider buying between $36 and $35.60.
The next upside target is $37.75 – the top of the channel. Traders could place a stop/loss order under the most recent low swing just prior to entry. If, for example, the price rises over $36.50, the most recent swing low would be $35.96. If it keeps falling in the short term, the most recent swing low would be $35.30.
EWT invests its assets in 92 securities, focusing on the Taiwanese equity market. However, with more than a fifth of the total exposure on a single company, Taiwan Semiconductor, EWT has a concentration risk.
Hon Hai Precision Industry takes up the second position in the portfolio with a 10.11% share. The rest of the stocks do not comprise more than 2.78% of the fund.
EWT relies strongly on information technology (57.8%), financials (16.8%) and materials (9.4%). It has an expense ratio of 64 basis points
Business optimism remains high in Asia. This, combined with a gain in tech shares, created a positive situation for the fund. Bullishness on the fundamentals of Hon Hai Precision Industry and Taiwan Semiconductor sent Taiwan shares to a 27-year high.
Wisdom Tree India Earnings Fund (EPI)
Wisdom Tree India Earnings Fund has experienced a strong uptrend since early 2017. After reaching a $26.90 high on Aug. 7, the price fell back to the rising trendline at $25.30. The price has already moved from the trendline area, trading at $26.10 on Aug. 16.
Patience is needed in allowing the price to move closer to the trendline before making a purchase. Should the price fall near $25, a stop/loss could be put below $24.20. The upside target is $27.30, which is above the former high.
EPI, with $1.7 billion, is more than nine years old and one of the biggest U.S.-listed India ETFs. EPI year to date is up 26.3%, an advantage of 620 basis points above the MSCI Emerging Markets Index.
India’s economic potential as the world’s biggest democracy and second largest country by population after China has long been heralded. That potential, as measured by EPI, will come to fruition and could continue to do so for several years to come.
Ridham Desai, head of research for Indian equities at Morgan Stanley, said the economic and earnings growth cycle is improving and should support earnings per share growth of 20% per year for the next five years.
During 2003 to 2008, the last major growth cycle, earnings compounded at 39% per year, according to the fund. EPI only holds profitable Indian companies. Its underlying index weights components are based on earnings before its index rebalance, which is a unique strategy among legacy India ETFs.
Historically, Indian stocks are volatile than broader emerging markets benchmarks. EPI, however, has a track record of superior risk adjusted returns. In the last three years, EPI has been 200 basis points more volatile than the MSCI Emerging Markets Index. The ETF is nonetheless up 17.9% over that period compared to 1.2% for the MSCI index.
iShares MSCI Mexico Capped ETF (EWW)
iShares MSCI Mexico pulled back to its rising trendline in August since reaching a $57.72 high two weeks prior. The trendline intersects slightly below $56, where the price stalled in trading between Aug. 9 and Aug. 11.
By Aug. 16, the price traded at $57.11. It will take patience to see if another purchasing opportunity arrives near $56. Whether or not another opportunity occurs, upside target is $59 to $59.50. A stop/loss could be put beneath the recent low of $55.47, but it might make sense to give the trade more room should the price fall back to the entry point and wiggles for a week or two, which often happens.
In addition to concerns about the impact of the U.S. presidency on Mexican stocks, EWW flailed last year because the peso fell. However, EWW is not a currency-hedged ETF, meaning there is no mechanism by which the ETF can benefit from the dollar strengthening against the peso.
While Mexico’s economy is largely export driven, because EWW not currency hedged, a falling peso does not benefit investors in this ETF. With the peso now one of this year’s best performing emerging markets currencies, EWW is benefiting.
Traders see more upside to the Mexican peso. Bloomberg reported that the U.S. Commodity Futures Trading Commission reported professional traders are bullish on the peso for the first time since May. There was a fund dedicated to the peso at one time, but it was shuttered years ago, leaving EWW as the most direct play on the Mexican currency.
EWW often trades at a premium to broader emerging market benchmarks. It holds 62 stocks. More than 45 percent of the fund’s lineup is in consumer staples and financial services.
Some of the bullishness this year can be credited to financial markets realizing that Trump is the U.S. president and despite his campaign rhetoric aimed at Mexico, the two countries’ relationship is mostly unchanged at the moment.
EWW and Mexican stocks are not fully in the clear. A Trump effort to renegotiate the North American Free Trade Agreement poses a possible risk. However, any trade talks are likely to include a push by Mexico to keep the peso stable.
These three country ETFs have exhibited strong uptrends, and there is no significant evidence to suggest the uptrends are over yet. Hence, the pullbacks present buying opportunities. When the price falls back to a trendline, it is a potential trade area, but traders need to be sure the possible reward outweighs the risk and they aren’t attempting to catch a “falling knife.”
EPI, for instance, experienced a hefty fall during the pullback, which is cause for concern. But if the price drops again and stabilizes near the trendline, the selling could lose momentum. This is positive for the bulls. In all trading, one can only put the odds in their favor and risk a small portion of account capital on any single trade.