EZU iShares MSCI Eurozone ETF

Across the globe, investing in the developed world is a mess. Europe appears headed back to anarchy after some uncertain voting results over the weekend, while economic data in America suggests a low growth economy for at least the foreseeable future.

Japan is equally troubled, as the country appears to be headed for another decade of zero growth while the nation’s demographic picture and ongoing nuclear issues don’t exactly paint a pretty picture for the long-term.

Yet despite this dearth of options, there are still a few good countries left. One that is often overlooked by many American investors is the small island nation of Singapore (see more in the Zacks ETF Center).

This city-state at the tip of Southeast Asia represents one of the more robust economies in the world that is a hub of activity at the heart of the Asian growth story. Yet, while the small nation is still a rapidly growing area, it is one of the richest countries in the world with a GDP (PPP) per capita of over $59,000.

Currently, this is good enough to put the country 3rd in the world when looking at this metric, edging out the United States by about $10,000. This suggests that the Singaporean model works as the nation has pretty much no natural resources, a small population, and extremely poor neighbors which have often had severe issues of their own.

How Singapore Did It

Seemingly, Singapore has made a name for itself by banking on the few advantages that it has; a prime location and a well-educated workforce. The country took these few positives and turned its country into a major port, both in terms of air and sea, and developed an export-driven economy with massive industries in sectors such as electronics and oil refining (read Play An Oil Bull With These Three Emerging Market ETFs.

It also hasn’t hurt that the Singaporean government has been one of the best run in the world for quite some time, as the country always ranks highly on competitiveness surveys that focus on government institutions and market efficiency. In fact, in a recent report, the country ranked 3rd on Earth for competitiveness including the top rank overall for government regulation, public trust of politicians, and wastefulness of government spending.

Beyond this favorable business climate, the country has also taken steps to diversify its economy outside of manufacturing, transportation, and finance and into tourism. The introduction of casinos and theme parks have helped to make the city a destination in the region and have likely helped to make the country less dependent on exports to power growth going forward.

Downsides to Singapore

The main detractor from investing in Singapore is that the country has a relatively heavy debt load. Debt to GDP is over 100% which could cause problems if citizens stop buying Singaporean securities. However, the country does have a robust sovereign wealth fund while it also has a favorable current account balance and nearly a quarter billion in foreign reserves.

Additionally, investors should note that despite the attempts to diversify the economy, exports to other markets are still key for the country suggesting that it may be exposed to outside shocks. Nevertheless, unemployment is below 2.5% (a level most Western economies would kill for)while life below the poverty line is pretty much an anomaly, suggesting that the country has held up pretty well so far and can continue to do so well into the future.

How to play Singapore

Currently, investors have two ways to play the Singaporean economy in ETF form with products from iShares. While the two funds may have some similarities, there are a few key differences that investors should be aware of, which we have highlighted below:

iShares MSCI Singapore Index Fund (EWS)

This ETF tracks the MSCI Singapore Index which looks to give investors broad exposure to the Singaporean stock market. The product charges investors 52 basis points a year and sees good volume of about 1.9 million shares a day.

In total, the fund has 33 stocks in its portfolio and is relatively concentrated in its top securities. The top three companies account for about 30% of total assets and include Oversea-Chinese Banking Corp, DBS Group Holding, and Singapore Telecom.

For sector exposure, EWS is tilted towards a few market segments as financials (32%), industrials (25%), and real estate (12%) take the top three spots. 92% of the stocks in the fund are classified as large caps, although from a style perspective it is split down the middle in terms of growth, value, and blend.

iShares MSCI Singapore Small Cap Index Fund (EWSS)

For investors looking for pint sized securities based in Singapore, EWSS could be an interesting pick. However, investors should note that the product is still quite young (having debuted in January of this year) while its volume is quite light suggesting wide bid ask spreads.

Nevertheless, the product offers access to 38 companies which represent the bottom 14% of the equity market in the nation. The fund is slightly less concentrated from a top holding perspective as the top three components only account for about 20% of assets.

Yet, from a sector perspective, the concentration issue reappears; financials make up 52% of the assets, followed by a 12.8% allocation to industrials, and a 7.8% holding in consumer staples. While this is somewhat disappointing, the yield is not; the 30 Day SEC Yield comes in at 4.1% for this small cap Singapore ETF (also read 11 Great Dividend ETFs.

Conclusion

While it is true that the funds are both heavily concentrated in financial securities, the promise of investing in Singapore comes when one looks at the performance of EWS compared to other developed markets. In the chart below, we compare EWS to the S&P 500 ETF (SPY), the MSCI Japan Index Fund (EWJ), and the iShares MSCI EMU Index Fund (EZU) over the past three years:

As you can see, EWS has easily beat out other foreign markets over this time period, while it has also edged out the American market as well. Although shorter-term charts do favor the U.S., investors should also remember that the Singapore ETF does pay out a robust yield of 2.7% in 30-Day SEC Yield terms, suggesting that at least some of the difference in performance can be eaten by this nice payout (read Southeast Asia ETF Investing 101.

Either way, Singapore appears to be a nice compliment to any portfolio that is looking for more international exposure. The country has a number of robust, durable competitive advantages which are unlikely to go away any time soon. Thanks to this, as well as the country’s favorable location as a gateway to Southeast Asia, it may be time to consider investing in the ‘Lion City’ for the long-term.

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