Turkey to Indonesia: Single Country ETFs as Diversifiers

Turkey, Indonesia and Greece may not be on the radar for most people looking to buy stocks or bonds, as much of today’s investment narrative is focused on the United States equity market. 

Given the world's largest economy's size and persistent growth over the past decade, this is understandable.

However, a look under the hood shows that the U.S. market is driven largely by the Magnificent Seven stocks and a relatively small cast of supporting players. For instance, the iShares Russell 3000 ETF (IWV) contains about 2,700 stocks. But the top 10 holdings occupy 28% of the ETF. Over the past 12 months, IWV is up 22% through Thursday’s close, or about $46 per share in gains over that period. About half of that came from only six stocks.

You get the idea; the U.S. market is top-heavy. With all the money that's piled into capitalization-weighted index funds, especially those based on the S&P 500, if that index hits an extended rough patch, the losses will be widespread.

That would argue for some escape routes, which translated to investing terms means “lower-correlation assets.” Bond ETFs have been less reliable in that regard, and with so much of the U.S. equity market moving in sync, it may finally be time for investors to think outside the box. That is, where the “box” is US equities. Not as a replacement, but as a complement. 

But there’s a counter argument which goes like this: when the U.S. sneezes, the rest of the world equity markets catch a cold. And, while that is quite valid for some non-U.S. stock markets, historically some countries that have displayed lower correlation to the S&P 500, and even to broader international equities. Here are a few that meet that description. Be forewarned, they are probably not places that most advisors and investors are used to considering. They don’t roll off the tongue like “Magnificent Seven” or “small caps.” 

TUR, IDX, GREK: Low Correlation to U.S. stocks 

First, there’s the iShares MSCI Turkey ETF (TUR) is a $192 million fund that has been around since 2008. It is off to a flying start in 2024, up more than 18%, which brings its five-year annualized return up to 10%. Financials are the largest sector at a 20% weighting, and 10 stocks make up about half the TUR portfolio. As opposed to the concentration of holdings issue noted above for IWV, since TUR is likely to be more of a supporting position in a portfolio, not the core piece, a top-heavy ETF structure should not be a handicap. 

Our search for lower correlation continues to Southeast Asia, where the Van Eck Indonesia ETF (IDX) invests. In the case of IDX, its lower correlation has come in the form of persistent negative returns. It has gone virtually nowhere but south in price since 2021, which explains its small $27 million asset base. Still, at under 14 times trailing earnings and yielding 3.8%, this financial sector-laden ETF would not be the first from this region to mount a huge comeback at some point. Based on performance patterns during its 15-year journey so far, that could come at a time of US market weakness. 

Finally, there’s the poster child economy for one of the worst regional economic slumps in modern history. That would be Greece, as represented by the $186 million Global X MSCI Greece ETF (GREK). Things reached such a crisis point back in 2015, the Greek stock market temporarily closed. But GREK, traded in the U.S., continued, with market makers estimating prices each day.

Today GREK is riding a five-year, 15% annualized return and still trades at only 7 times earnings. That might cause some to consider whether to read the tea leaves on this ETF. Or perhaps the grape leaves in this case. 

The world is full of people, stocks and stock markets. 2024 looks like the time for some of those people to embrace the potential of some of the stocks whose companies are based far from the United States.