How to invest overseas using single-country funds and ETFs

For that reason alone, financial advisers typically recommend putting 15 percent of a stock portfolio in non-U.S. markets. For most people, a diversified international mutual fund covers the map. Yet if you’re keen on a particular foreign market, consider giving a small portion of your international allocation to a fund that invests exclusively within the borders of a specific country.

China is a good example. Robust economic growth and developing consumer demand has pushed Chinese stocks higher and rewarded investors. For example, China’s Shanghai B exchange is up about 12 percent this year so far. Russia funds also have been strong performers, along with funds investing in Japan, Brazil, Thailand and Indonesia. Russian stocks have soared about 18 percent this year so far; Indonesian stocks are up more than 7 percent. Meanwhile, Japan apparently has emerged from its decade-long doldrums; Japan funds rose 53 percent in the past year.

Are country funds right for you?

There’s a high variability of returns over time with these investments, but they can be rewarding. Over the past five years, the best-performing country fund of all is the ING Russia fund (LETRX), up almost 800 percent. There are about 80 country funds to choose from, in addition to myriad closed-end country funds and exchange-traded funds that mirror a market index. Of course, the stellar gains of single-country investments typically come with greater risk. Putting money into these markets requires an understanding of politics, economic policies, and currency shifts. Don Cassidy, senior research analyst at fund data firm Lipper, said the decision to buy a country fund depends on your net worth and risk tolerance. Start with a broad-based actively managed or indexed international fund, he said, and then narrow your focus. “Country and sector funds are things you do later,” Cassidy added.

Open and closed

Many well-known fund families offer single country funds. The professional investment management and record keeping these companies provide make traditional, open-end country funds a popular choice among individual investors. Fidelity Investments, for instance, features country funds in targeted markets in Europe, Asia and Latin America. Closed-end funds are another option for investors. With closed-end funds, the main concern is whether the portfolio is priced at a discount or premium to the value of its underlying assets. When the fund trades at a discount to net asset value, it suggests lax investor demand. If the market rebounds, that discount should narrow over time, giving you capital appreciation in the portfolio’s stocks and additional upside as the discount narrows and the fund’s share price moves closer to its NAV. Nowadays many closed-end funds investing in China and India, for example, trade at a premium to NAV, said Mariana Bush, closed-end and exchange-traded fund analyst at Wachovia Securities in Washington.

In such cases of extreme demand, shareholders actually pay more than the portfolio is worth just to stake an investment, when an open-end fund would offer a similar opportunity at the NAV price. Country funds trading at a discount to NAV include portfolios devoted to Ireland, Germany and Israel. But a big discount isn’t enough to warrant investment, Bush said. More important, she added, is whether it makes sense to be in that country and if a fund is trading at a reasonable valuation.

Consider ETFs

A flexible and growing option for investors are exchange-traded funds, or ETFs, which track a specific index and are priced throughout the trading day like an individual stock. ETFs are flexible and inexpensive alternatives to traditional funds. The leading provider of country ETFs is giant Barclays Global Investors, which offers a line of 21 separate funds under its iShares brand that track specific indexes from Morgan Stanley Capital International. Investors can supplement or modify broad non-U.S. holdings with ETFs. For instance, if you want greater exposure to Japan than an international fund is giving, a Japanese market ETF can provide a low-cost overweight. All abroad While many non-U.S. markets have delivered searing gains over the past several years, Lipper’s Cassidy said there are still attractive buys among country funds. “We are still in the early phases of an up part of a business cycle that will be worldwide,” he said, adding that certain countries are poised to benefit strongly. Cassidy’s favorite growth-markets include Mexico, Brazil, Korea, Japan and China. “There is a lot of potential in the Far East and a fair amount in Latin America — more so than in Europe,” he said.