In today’s globalized economy, can any ETF give investors a “laser focus” on a single country’s economy? It’s an interesting question and one that was raised last week as investors scrambled to short Spanish debt using ETFs. As Standard and Poor’s downgraded the country’s credit rating over concerns about the government’s exposure to ailing Spanish banks, investors shorting ETFs based on Spanish equities to make a tidy profit.
For example, the iShares MSCI Spain ETF (EWP) saw trading volume jump to 885,000 shares on Thursday – a huge spike from its daily average of around 200,000 shares a day. This prompted this article on Institutional Investor to look under the hood of the EWP to see what kind of Spanish exposure it offers. The article finds that the ETF’s two largest holdings are Banco Santander (20%) and Telefónica (18%). The fortunes of these two companies are tied heavily to Brazil – an emerging market with very low correlations with Spain.
So, investors looking for exposure to Spain’s equity market will get it from the EWP. But they’re going to get a good dose of Brazil on the side.
So much for a pure play on Spain. But it raises an interesting question. In this day and age, can we really expect pure country exposure from an ETF? Or from any kind of equity investment for that matter?
As companies increase their global presence, their fortunes are no longer tied to the countries in which they are listed. Sure investors should look closely at specific companies that play a large part in certain ETFs to make sure they offer the right kind of exposure.
But at the end of the day there’s really no such thing as pure country exposure, especially when it comes to indices. And perhaps asking that an index to deliver it is rather like tilting at windmills….