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The 3 Worst Single-Country ETFs So Far in 2018

Dan Caplinger, The Motley Fool

Many U.S. investors avoid investing internationally because it can be tricky to get access to the stocks you want. You can find some foreign stocks listed on U.S. stock exchanges, but if you rely solely on stocks you can buy on domestic exchanges, you'll miss out on a lot of key companies.

That's a big part of the reason exchange-traded funds that focus on single countries have become so popular. By offering exposure to companies based in a certain nation, investors can tailor their exposure and take advantage of the opportunities one country can offer. Yet sometimes, those bets go awry when bad things happen in the local area. Below, I'll look at the three worst performers so far this year among single-country ETFs with more than $200 million in assets under management and try to explain what has happened to cause them to lose so much ground.

ETF

2018 YTD Return

iShares MSCI Turkey (NYSEMKT: TUR)

(48%)

Van Eck Vectors India Small-Cap (NYSEMKT: SCIF)

(30%)

iShares MSCI South Africa (NYSEMKT: EZA)

(26%)

Data source: ETFdb.com.

Crisis in Turkey

Emerging markets have struggled this year, and the biggest problem has been Turkey. This fast-growing economy straddles Europe and Asia, and market participants have gotten spooked by the policies of President Erdogan both economically and geopolitically. Turkey has been one of the first places refugees fleeing Syria have gone, and many other European countries have resisted allowing refugees to continue westward. Moreover, worsening relations between the U.S. and Turkey have raised new concerns among economists, leading to a dramatic decline in the value of the Turkish lira in August that further destabilized Turkey's economy.

About half of the Turkey ETF consists of financial and industrial stocks, and both of those sectors could face further pressure if the crisis doesn't end soon. Financial stocks are vulnerable to continued volatility in the lira, while industrials could suffer if trade tensions escalate into even harsher tariffs than those currently in place. Barring a quick reversal, investors in the Turkey ETF should anticipate further choppiness in the fund's returns for the rest of the year.

White mosaic tiles spelling ETF against a yellow mosaic background.

Image source: Getty Images.

Why India is under pressure

India has been extremely strong in recent years, with the rise of a pro-business government helping to spur greater economic development. Yet even the biggest bull markets have to take a pause, and the Van Eck Vectors ETF that focuses on small-cap Indian stocks has seen dramatic losses so far this year. That seems surprising, given that the large-cap Sensex index has hit all-time highs in the past month. But a falling rupee has reduced returns in U.S. dollar terms, and smaller stocks haven't kept up with their larger counterparts.

When you look at the fund's holdings, they're fairly evenly balanced, with about 80% of assets split among consumer discretionary, materials, industrials, financials, and tech stocks. Yet despite some big gains in many of the smaller technology companies held by the ETF, losses in areas like the sugar industry and other commodities have taken their toll on returns. India's future prospects are the best of the three countries discussed here, but it's not surprising to see setbacks like this one happen.

Less-than-golden performance

South Africa is among the richest nations in the world in terms of natural resources, with a wealth of gold, platinum, and diamond mining assets that have brought enormous influxes of capital into the country. However, those valuable assets have to be mined, and recently, unrest among laborers who work under harsh conditions has caused turmoil across the South African economy, exacerbating already nervous investors who have watched prices of gold stagnate and platinum plunge in recent years.

Interestingly, the iShares South Africa ETF doesn't have as much direct exposure to mining stocks as you might expect. Financial and consumer stocks make up almost 70% of the portfolio, with materials a distant third. Yet high unemployment has called into question the sustainability of economic growth without a firm backing from natural resources, and that's been a key issue in producing losses for the stock market in South Africa.

Can these ETFs rebound?

Many of the issues that have kept these ETFs down so far in 2018 are longer term in nature, and it's therefore unlikely that a quick turnaround will occur without more intervention than is likely. If the trade policies the U.S. has adopted over the past year continue, Turkey and South Africa are likely to remain under pressure. Of these three ETFs, the India small-cap fund has the best chance of regaining some of its lost ground if the Indian rupee can recover and the emerging nation's solid economic footing reasserts itself.

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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.