Like any good advisor, Scott Kaminsky's goal is to create a diversified portfolio for his high-net-worth clients. That used to be done through broad-based mutual funds that held equities in countries around the world, but three years ago the Morgan Stanley vice president and wealth advisor discovered a better way to get international exposure: country-focused exchange-traded funds.
The Bryn Mawer, Pa.–based CFP's love affair with country-specific ETFs began after the world's stock markets stopped rising and falling in lock step with one another. Now that the global economy is recovering, certain nations are starting to outperform broader benchmarks, while others are struggling.
Kaminsky wants to take advantage of those soaring sovereign states and leave the duds behind.
"It's important to have exposure overseas, but you want to have exposure to countries that are doing well," he said. "So you don't necessarily just want to buy a broad-based ETF that covers, say, the entire emerging markets."
While ETFs have been giving investors easy access to diversified baskets of stocks for two decades now, it's only recently that investors and advisors have been using these instruments to invest in more specific non-U.S. markets, said Aniket Ullal, founder of First Bridge Data, a Fremont, Calif.–based ETF data provider. The ease of this approach has fueled the trend: Because it trades like a stock, an ETF allows you to sell short, buy on margin, and purchase as many shares as you want.
Usually, an ETF investor buys a fund that tracks his or her home index, and then that purchases broader-based securities, such as iShares' MSCI Emerging Market Index (NYSE ARCA: EEM), or iShares' MSCI EAFE ETF (NYSE ARCA: EFA), to get access to other global markets.
While the majority of ETF investors still buy more all-encompassing funds to access international markets, inflows into country funds are on the rise. According to ETFGI, an independent investment research firm, over the last five years, assets in non-U.S. country funds have grown by 204 percent to $376 billion.