Best Performing Single Country ETFs

It's not a great time to invest outside the U.S.—at least, not by using single-country ETFs. Most single-country ETFs have lost money so this year, with an average year-to-date return of -1.43%.

Yet even among slim pickings, a few high-performers stand out. Here are the three-best-performing single-country ETFs of 2018 so far:

Sources: ETF.com, FactSet. Data as of May 24, 2018.

At a cursory glance, this list seems to be a story about energy; specifically, rising crude oil prices. But first impressions can be misleading. Looking under the hood of these three funds reveals a deeper story about the power of economic reforms and the evolution of market diversity in emerging economies.

Rising Optimism In Saudi Arabia

The best-performing ETF of 192 single-country ETFs is the iShares MSCI Saudi Arabia ETF (KSA), a total-market fund that captures the Saudi Arabia equity market. Year-to-date, KSA has risen 16.04%.

KSA, the only Saudi Arabia ETF, is large, and popular with investors. To date it has $224 million in assets under management (AUM) and $190 million in new net inflows for the year.

Contrary to expectation, KSA only provides limited exposure to energy (22%); most of the country's oilfields and energy companies are privately owned by the royal family. Instead, the bulk of KSA's portfolio is in financials (41%), though mega-cap Saudi Basic Industries (SABIC), a basic materials company, alone comprises 11% of the fund.

That positions KSA well to ride the optimism generated by several social and economic reforms over the past few years, reforms that have modernized the country and attracted new industries.

Since June 2015, when Saudi Arabia first opened its markets to foreign investment, huge corporations like Dow Chemical and Lockheed Martin have inked multibillion-dollar deals within the country. More recently, Saudi Arabian Crown Prince Mohammed bin Salman has pushed for greater social reforms, such as allowing women to drive and enter sports stadiums, and lifting bans on movie theaters and live concerts.

This modernization has convinced indexers to give Saudi Arabia a second look. FTSE Russell plans to add Saudi Arabia to its emerging markets index next year, with a starting weight of 2.7%; this could go higher if and when the IPO of oil giant Aramco goes through in 2019. Meanwhile, MSCI is currently weighing whether to include Saudi Arabia in its emerging market indexes. Its decision will be made by June.

KSA's expense ratio is 0.74%. Though not chump change, that's roughly average for Middle East and Africa (MEA) ETFs.

Chinese Energy Demand Outstrips Supply

The next-best year-to-date performer is the $3.3 million Global X China Energy ETF (CHIE), which has risen 14.29%.

That a Chinese energy ETF should outperform in 2018 is little surprise, given the seemingly insatiable Chinese hunger for energy. Despite ramped-up imports—China recently raised its 2018 crude oil import quota 55% in 2017—domestic demand keeps outstripping supply.

Chinese energy companies have also benefited from increased foreign investment; since 2012, China has inked more than 100 international cooperation agreements and established 85 bilateral or multilateral projects, reported Xinhua.

CHIE, which tracks a market-cap-weighted index of 40 Chinese energy firms, aims to provide diversified exposure beyond just the usual oil and gas giants, even though PetroChina and CNOOC are still the fund's top two holdings (just over 10% each).

The biggest chunk of CHIE's portfolio, however, is in natural gas and electric utilities (46%), followed by oil and gas refiners and E&P firms (25%). There are even coal producers (7%) and renewables firms (3%).

As such, CHIE reflects not just the diversity of the Chinese energy market, but its transition from coal into natural gas. China is already the world's largest natural gas consumer, and will account for as much as 35% of global demand in the coming years.)

CHIE is a tiny and illiquid fund, with sub-$100K daily trading volume and massive average spreads (1.87%). It also isn't cheap, with a price tag of 0.65%. If you choose to trade, do so carefully.

Egypt Growth Quickens

The third-best performer in 2018 is the $76 million VanEck Vectors Egypt Index ETF (EGPT), a market-cap-weighted index of companies earning at least 50% of their revenues from Egypt. The fund has risen 12.23% to date.

Charts courtesy of StockCharts. Data as of May 29, 2018.

Like KSA, EGPT's outperformance can't be tied to rising oil prices. Though Egypt produces crude, it actually imports more than it makes. As such, the energy sector comprises just 11% of EGPT's holdings.

Instead, EGPT's rise is more attributable to solid fundamentals in the Egyptian economy, such as its (relative) political stability and recent economic reforms. Two years after the International Monetary Fund approved a three-year, $12 billion bailout for the country, inflation in Egypt has begun to drop, while its GDP has risen considerably. The Institute of International Finance recently projected Egypt could grow at a rate of 5%, reported CNBC, or the highest rate in the MEA region.

The bulk of the ETF's portfolio are in financials (32%), followed by basic materials (14%) and industrial firms (12%). Its largest holding is Egypt Kuwait Holding, a private equity firm that invests in energy, infrastructure and information technology.

All that optimism aside, EGPT comes with a slew of caveats. EGPT is a narrow fund, with only 25 names and a heavy tilt toward small-caps. Its liquidity isn't great, either; currently, its average spread is 0.53%.

EGPT's biggest downside, however, is its 0.94% expense ratio, the highest of all MEA ETFs.

Contact Lara Crigger at [email protected]