Global stocks are no longer a monolith. Why India and Japan ETFs are drawing investors into single-country funds in 2024.

MW Global stocks are no longer a monolith. Why India and Japan ETFs are drawing investors into single-country funds in 2024.

By Isabel Wang

Investors need to beware the concentration risk in single-country ETFs, one analyst says

Hello! This is MarketWatch reporter Isabel Wang bringing you this week's ETF Wrap. In this edition, we look at single-country ETFs, which have staged a strong comeback in 2024 as investors are becoming more selective in their regional allocations amid a strong U.S. dollar and interest-rate uncertainty.

Please send tips or feedback to isabel.wang@marketwatch.com or to christine.idzelis@marketwatch.com. You can also follow me on X at @Isabelxwang and Christine at @CIdzelis.

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U.S. investors are snapping up exchange-traded funds with a single-country focus in 2024, dumping multinational ETFs and bypassing China's market in favor of other emerging nations with stronger growth prospects.

U.S.-listed ETFs investing in Indian equities have seen nearly $2.7 billion of net inflows so far in 2024. The iShares MSCI India ETF INDA, the largest India-related fund, has seen $1.5 billion of net inflows year to date. The fund has risen 5.6% over the past four months, compared with a 5.3% year-to-date advance for the iShares MSCI Emerging Markets ETF EEM, according to FactSet data.

Indian stocks have outpaced other emerging-market equities over the past year, with INDA advancing 24.4% over the past 12 months, while the broader EEM was up 8.1% over the same period, according to FactSet data.

Neena Mishra, director of ETF research at Zacks Investment Management, said her team has witnessed a surging investor interest in India due to the country's robust economic growth and the inherent strengths in its stock market.

See: Opinion: India must avoid the mistakes of China and Big Tech to keep attracting investors

In 2023, India's economy expanded at a faster pace than China, clocking in a GDP growth of around 7.5% while China only grew 5.2% over the same period. The India Nifty 50 IN:NIFTY50, the benchmark index that represents the weighted average of 50 of the largest companies listed on the National Stock Exchange, has surged over 20% in the past 12 months, compared with a 6% slump for China's Shanghai Composite Index CN:SHCOMP over the same period, according to FactSet data.

Another reason why India-related ETFs are outperforming the emerging markets is because many of the megacap technology giants in the U.S. are pursing India as a supply-chain alternative to China amid rising geopolitical tensions between Washington and Beijing, Mishra told MarketWatch via phone on Thursday.

See: India is winning over investors as Chinese stocks struggle, these charts show

Investors are fleeing China

Expectations that the world's second-largest economy would stage a strong post-pandemic economic recovery faded in 2023, as mounting local government debts, weak consumer demand and a beleaguered property sector weighed on the Chinese economy and its financial markets.

Global investors have cut exposure to China ever since. The iShares MSCI China ETF MCHI was off 5% over the past year, while the iShares MSCI Emerging Markets ex China ETF EMXC has advanced 14.3% over the same period, outpacing an 8.2% gain for the broader iShares MSCI Emerging Markets ETF.

Renewed interests in Japan equities

U.S. investors who previously bet big on Chinese stocks have recently turned to Japan equities, looking for ways to seize on the rally in one of the world's hottest markets, while stripping out the currency exposure to a foreign economy.

The Japanese yen $(USDJPY.FOREX)$ fell to a fresh 34-year low to the U.S. dollar DXY last week, before rising this week amid trader jitters that the Bank of Japan had intervened to support its beleaguered currency.

After years of struggling with deflation and a sluggish economy, Japan appears finally to be back on track for sustainable growth in 2024. The Nikkei 225 JP:NIK, the country's benchmark stock index, reached multiple record highs earlier this year, up 13.8% year to date, while the S&P 500 SPX has risen 9.3% over the same period, according to FactSet data.

The iShares MSCI Japan ETF EWJ has advanced 6.5% this year, while the WisdomTree Japan Hedged Equity Fund DXJ, a currency-hedged ETF, has jumped 23.7% year to date. That compared with a 5.7% advance for the iShares MSCI ACWI ex U.S. ETF ACWX over the same period, which tracks a range of non-U.S. equities from developed and emerging markets, according to FactSet data.

U.S. markets have outpaced their global counterparts over the past few years, continuing a decade-long trend of strong growth compared with the rest of the world. However, investors are beginning to review opportunities outside of the U.S. as they have become concerned about rising geopolitical tensions, sticky inflation and overstretched market valuations, Mishra said. "We've seen data that shows interest in diversifying out of the U.S.. That's why [there's] some interest in the single country [ETFs]," she added.

Beware of concentration risk in single-country ETFs

While the notable outperformance in a few international markets is driving demand for a more selective strategy when investing in non-U.S. equities, investors need to beware the concentration risk that comes with "taking a more granular approach," Mishra said.

"We have seen investors willing to take that risk and bet on single-country [ETFs] rather than the broader emerging markets ETFs, but if you want to take a diversified approach, then funds [related to] emerging markets or broad international ETFs are better," she said.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                   %Performance 
   United States Natural Gas Fund LP                                                                                                                                                7.3 
   First Trust RBA American Industrial Renaissance ETF                                                                                                                              5.4 
   Bitwise Bitcoin ETF Trust                                                                                                                                                        4.7 
   VanEck Bitcoin Trust                                                                                                                                                             4.7 
   iShares Bitcoin Trust Registered                                                                                                                                                 4.7 
   Source: FactSet data through Wednesday, May 8. Start date May 2. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

... and the bad

   Bottom performers                          %Performance 
   AdvisorShares Pure US Cannabis ETF         -6.9 
   YieldMax TSLA Option Income Strategy ETF   -5.8 
   Invesco China Technology ETF               -3.5 
   iShares MSCI India Small-Cap ETF           -2.9 
   WisdomTree India Earnings Fund             -2.5 
   Source: FactSet data 

New ETFs

Global X ETFs on Wednesday launched the Global X MLP & Energy Infrastructure Covered Call ETF MLPD and the Global X S&P 500 Quality Dividend Covered Call ETF QDCC. The funds seek to offer "diversified income" by holding and then writing call options on the Global X MLP & Energy Infrastructure ETF MLPX and the Global X S&P 500 Quality Dividend ETF QDIV, respectively, the company said in a press release.The TCW Group on Monday completed the conversion of two mutual funds into ETFs: the TCW Artificial Intelligence ETF AIFD, previously known as the TCW Artificial Intelligence Equity Fund TGFTX, and the TCW Compounders ETF GRW, previously known as the TCW New America Premier Equities Fund TGUSX. Tremblant Capital on Friday launched the Tremblant Global ETF TOGA, an actively managed fund that seeks to hold 30 to 50 positions in companies undergoing "disruptive consequential change" and durable long-term growth businesses, with an emphasis on large- and mid-cap companies, the firm said in a press release.

Weekly ETF Reads

How GMO's ETF is beating the S&P 500 this year - without Nvidia (MarketWatch)Grayscale Bitcoin Trust Sees First Inflows Since US ETFs Were Approved (Bloomberg) What should the Bank of Japan do with its huge stock portfolio? (Financial Times) This Vanguard ETF Navigates Emerging Markets with a Low-Cost Strategy (MorningStar) Thematic ETF Winners of the Q1 2024 Earnings Season (ETF Trends) Are CEF to ETF Conversions the Latest Trend? (ETF Trends)

-Isabel Wang

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May 09, 2024 16:53 ET (20:53 GMT)

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