How To Use Single Country ETFs

August 17, 2017

Vitaly Veksler is founder and portfolio manager of Beyond Borders Investment Strategies, a boutique investment firm focused on international equities. Previously, he was vice president and investment analyst at BNY Mellon Asset Management. recently spoke with Veksler about his recent paper, Investment Lessons From Fishing; Building Portfolios From Single-Country ETFs, in which he outlines the benefits of investing in single-country ETFs. Why do you think the single-country ETF strategy is better than a more broad-based strategy?

Vitaly Veksler: In many cases, individual countries are trading at significantly lower valuations compared to the averages.
Also, in the broad indices, the largest countries have a very high weighting. Let’s say the weight of the four or five largest countries in an index is 60%. That means the other 40 countries are responsible for just 40%, or only 1%, on average.

If you’d like to be exposed to these largest countries, that's fine; the broad-based indices are very useful. But if you’re interested in getting exposure to smaller countries such as Peru, Malaysia, or any country like that, then it’s better to go with individual single-country ETFs. What valuation metrics do you use when deciding whether a country is undervalued or overvalued?

Veksler: We use several valuation measures to determine whether a country's market is overvalued or undervalued. Some of them include market-capitalization-to-GDP, price-to-earnings, price-to-book, price-to-cash-flows, and price-to-sales.

Market-capitalization-to-GDP, a long-term market valuation indicator, is our measure of choice in determining whether a country is overvalued or undervalued. This measure is a version of the Buffett Indicator, named after Warren Buffett, who stated in his interview with Fortune magazine in 2001 that market-cap-to-GNP is "probably the best single measure of where valuations stand at any given moment."

We use GDP [gross domestic product] instead of GNP [gross national product], because for most countries, GDPs have longer histories, while the values of these economic growth indicators are not that far apart.


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