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The 10 Best Country ETFs of 2017

Dan Caplinger, The Motley Fool

International investing can be tricky for U.S. investors. Some foreign companies list their shares on U.S. stock exchanges, but many -- including some of the largest businesses on the planet -- aren't available on the New York or Nasdaq Stock Exchanges. For those who don't want to go to the trouble of inquiring about getting access to foreign stock exchanges, international exchange-traded funds offer an easier path into overseas markets.

The iShares line of ETFs has made international investing a specialty. Investors can find more than 60 different funds that are oriented toward single countries, many of which performed extremely well in 2017. The following funds had the top returns last year, and they reveal a lot about what the latest trends in international investing are.

ETF

Assets Under Management

Expense Ratio

2017 Return

iShares MSCI India Small-Cap (NYSEMKT: SMIN)

$341 million

0.75%

62%

iShares MSCI Germany Small-Cap

$74 million

0.59%

57%

iShares MSCI China (NASDAQ: MCHI)

$3.12 billion

0.62%

53%

iShares MSCI Poland

$383 million

0.63%

53%

iShares MSCI Austria

$279 million

0.49%

53%

iShares MSCI Brazil Small-Cap

$78 million

0.62%

51%

iShares MSCI South Korea (NYSEMKT: EWY)

$4.31 billion

0.62%

44%

iShares MSCI Chile (NYSEMKT: ECH)

$578 million

0.62%

43%

iShares MSCI Turkey

$376 million

0.62%

37%

iShares MSCI India (NYSEMKT: INDA)

$5.64 billion

0.68%

36%

Data source: ETFdb.com.

Moving beyond the obvious

Those who've followed country ETFs over the years have seen the space evolve dramatically. At first, the focus among most investors was on developed nations. Even now, iShares has more assets in its Japan fund than in its next three largest ETFs combined, and Germany also remains a favorite pick among country-fund investors.

The rise of emerging markets in the early 2000s started to turn the tide, spurring the fund manager to create new funds offering exposure to those increasingly important foreign markets. Brazil, India, and China attracted huge numbers of investors. Over the years, emerging markets performed quite well, rewarding those investors who jumped in early.

Yet more recently, those looking at international stocks have sought new ways to invest, and some of the best returns have come from newly explored niches. Within larger foreign markets, small-cap stocks have gained notoriety, in large part because market capitalization-weighted index funds have tended to ignore these smaller stocks in the past. At the same time, smaller economies like Austria, Chile, Poland, and Turkey have attracted attention from investors wanting opportunities in lesser-followed markets.

Taj Mahal with two other buildings and the Yamuna River in the foreground.

Image source: Getty Images.

The importance of India

The fact that India shows up twice on this list deserves particular notice. The Indian economy has unmatched potential in the world, largely because it has the largest population of any country in which English is a primary language. Although China gets most of the publicity as the most populous nation on Earth and with a long history of strong growth rates, current projections from the U.N.'s economic affairs department show that India will likely become the fastest-growing economy in the world in the near future.

India offers plenty of solid large-cap investment prospects, including leaders in the banking, manufacturing, and technology. Yet as the results from 2017 show, some of the smaller companies in the Indian economy are taking even greater advantage of favorable conditions there. With a government in place that has demonstrated a business-friendly set of policies, India could see sustained gains for years to come.

What's ahead in 2018?

Key trends like an increased appetite for small-cap stocks and a greater focus on previously neglected nations with smaller economies played a major role in 2017's returns, and there's little reason to expect changes in those attitudes in 2018. As the U.S. bull market ages, many investors are looking at international markets for better values. Country ETFs make interesting investment vehicles for betting on the success of specific economies, and making the right choices can lead to extremely strong returns for smart investors.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.