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Increasingly, ETF’s are being offered to get exposure on single countries. You can of course buy exposure into countries like the US, Canada or France but also BRIC countries (Brazil, Russia, India & China). Often, investors such as me want to invest in a country because of its economic performance, its growth. The problem of course is that you do not necessarily make money when the GDP does well. So what are the best ways to profit from such a situation?
Equity or Currency???
There is of course no easy answer to such a question as economists even to this day do not agree and of course there are many different ways to look at the problem. In my case, I was wondering if you would be better off investing in the currency of a country (through a currency ETF) or in its stock market (through an equity ETF). The method is far from perfect but I thought it would make an interesting comparison and could lead to a good analysis.
So what I did was look for countries that have both equity and an FX ETF. In the case of Europe, I had to group them together since the Euro is used for most countries. I also needed at least 1 year of historical data for both set of ETF’s and in general I stayed away from leveraged ETF’s. I did try to look at leveraged ETF’s for Japan but you will see how that went.
Obviously, every country is different and a country like Japan would benefit much more from a weak yen economically then most countries given the importance of exports to its country. But the goal here was simply to look at some data and then discuss. So I would appreciate getting your input on the results obtained.
Also, for a few countries, there were several ETF’s that fit the criteria. I usually selected one or two based on popularity and objectives and then took the average when comparing
Without further delay, here are the results by Country/Region:
Results for the past year
Japan
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
iShares MSCI Japan Index Fund EWJ 1.32 -0.06 JYF WisdomTree Dreyfus Japanese Yen Fund
0.15 FXY CurrencyShares Japanese Yen Trust
-0.21 JYN iPath JPY/USD Exchange Rate ETN
Average 1.32 -0.04 Average
Not much of a difference here with both currency and equity ETF’s being close to flat in the past year. (1.36% equity over performance)
United Kingdom
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
iShares MSCI United Kingdom Index Fund EWU 4.39 3.66 GBB iPath GBP/USD Exchange Rate ETN
Same conclusion as Japan with equities very slightly overperfoming currencies. (.73% equity over performance)
Australia
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
iShares MSCI Australia Index Fund EWA 9.40 24.17 FXA CurrencyShares Australian Dollar Trust
Australia was one of the performing currencies in the past year and the equity markets did not match the performance (14.76% FX over performance)
Canada
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
iShares MSCI Canada Index Fund EWC 8.00 11.78 FXC CurrencyShares Canadian Dollar Trust
Solid returns in both but FX wins it (3.78% FX over performance)
Switzerland
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
iShares MSCI Switzerland Index Fund EWL 6.00 7.17 FXF CurrencyShares Swiss Franc Trust
Good returns in both but FX wins it barely (1.17% FX over performance)
Mexico
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
iShares MSCI Mexico Investable Market Index Fund EWW 19.20 10.49 FXM CurrencyShares Mexican Peso Trust
Equity markets have had an amazing run in Mexico and even the strong peso did not account for close to that (8.71% equity over performance)
Sweden
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
iShares MSCI Sweden Index Fund EWD 9.80 13.31 FXS CurrencyShares Swedish Krona Trust
The Krona ruled… (3.71% FX over performance)
Europe
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
Vanguard European ETF VGK 12.79 8.79 FXE CurrencyShares Euro Trust
3.73 ERO iPath EUR/USD Exchange Rate ETN
Average 12.79 6.26 Average
This one is a bit difficult to evaluate because Europe is so broad and not all countries in Europe are part of the Euro currency zone. But it was worth looking at (6.53% equity over performance)
Brazil
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
iShares MSCI Brazil Index Fund EWZ 29.68 6.43 BZF WisdomTree Dreyfus Brazilian Real Fund
When a stock market returns 30% or so…you could not possibly expect the FX to match that return (23.24% Equity over performance)
Russia
Currency ETF Ticker Return 1Y Return 1Y Ticker Equity ETF
Market Vectors - Russia ETF RSX 19.39 5.80 XRU CurrencyShares Russian Ruble Trust
Another BRIC stock and another equity win (13.59% equity over performance)
India
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
iPath MSCI India Index ETN INP 28.08 1.88 ICN WisdomTree Dreyfus Indian Rupee Fund
2.91 INR Market Vectors-Rupee/USD ETN
Average 28.08 2.39 Average
India is actually the country (among those looked at here) where the equity over performance is the most important with over 25% more in the equity return. (25.69% equity over performance)
China
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
iShares FTSE/Xinhua China 25 Index Fund FXI 12.36 0.10 CYB WisdomTree Dreyfus Chinese Yuan Fund
(0.01) CNY Market Vectors-Renminbi/USD ETN
Average 12.36 0.05 Average
Like other BRIC stocks, equity wins (12.31% equity over performance)
Leveraged Japan
Equity ETF Ticker Return 1Y Return 1Y Ticker Currency ETF
ProShares UltraShort MSCI Japan EWV (32.01) (1.50) YCS ProShares UltraShort Yen
The Conclusion
FX easily won this one because of a massive underperformance in the EWV ETF (30.51% FX over performance)…but given the long term characteristics of leveraged ETF’s, I don’t consider this result as significant in any way.
Conclusion: There could be much said about this and I will have to spend more time but on average, the equity ETF’s over performed in the past year over the FX currency of each individual country. Will the tendency remain? It will be interesting to see.
As well, I find it very interesting that BRIC ETF’s were so one-sided compared to the others
BRIC: Equity over performance by 12.29% on average
Other countries: FX over performance by 0.74% on average
Any thoughts on the results or the reasons why? I am certain that a full post could be written on almost any of these countries but I certainly thought the result was still a very interesting one.
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Great post! wow that’s an fascinating discovery!! I knew that BRIC countries are potential investment opportunities, but, I am very surprised with that result. No doubt it is a good piece of information!! I’m now thinking investing in BRIC ETFs. BKF or EEB or BIK? But which one, concerning Expense ratio vs Replication?
Thank you.
Just to understand your results, i have a few questions:
Are equity ETFs converted in US$? Are FX ETFs based on US$? What’s the difference between JPN and Leveraged JPN results?
What time period did you use? In 2008 equity ETFs did much worse than your figures indicate. In 2009 they did much better. I don’t think one year is sufficient to draw a conclusion.
@Zavi – Difficult to say, Brazil is the popular one and likely will remain so for a few years so I think I’d go with that one.
@John – Good questions. Actually, all ETF’s presented here are US ETF’s so no conversion necessary on my part, they are all included in the 1 year return of these ETF’s. And as for the difference between the leveraged returns, honestly I did not spend too much time on that since results did not see to make much sense.
@Adam – I did a one year period ending last Friday. And yes I agree that it’s difficult to draw conclusions from it, but I thought it would be interesting to look at results and might warrant more time. Any thoughts?
[...] Speculator compares investing in one country’s currency or market index… the result is quite [...]
I think this is a great first cut at analyzing not only the differences between equity and currency ETFs but also country specific opportunities. As already mentioned, the BRIC countried obviously have shown strong returns over the last year and definitely warrant further analysis as part of an overall international investment strategy.
@Adam – Any thoughts or ideas on the reasons that caused the differences for BRIC’s?