Beyond the Broad Index

passport stampInvestors came flooding back to global equities at the end of 2013 as flows into equity exchange-traded funds (ETFs) reached an all-time high. Last year, a record $247.3 billion flowed into equity ETFs—the most since 2008—with the U.S. and Japan leading the way. Even Europe managed to draw investors, with inflows more than double what they were in 2012.

It’s a trend that’s likely to continue in 2014 as the Fed moves to further trim back its $85-billion bond-buying program in the wake of better economic news in the U.S.

But as global economies slowly recover, the growth is going to be far from even—in fact, there are some clear problem spots. One of them is right here. Last week’s Canadian job surprise drove the loonie lower as investors reacted to 46,000 lost jobs and as policy-makers continued to worry about the great Canadian debt binge. Add this together and Canadian stocks could disappoint at the same time as our neighbours to the south are surging ahead.

Clearly, not all developed markets are on the same path. Same goes for emerging markets, where countries such as South Korea have shone bright and countries such as Turkey have done poorly.

For investors used to buying into broad indexes, the uneven nature of global economic recovery poses a big problem as underperformers drag the broader index down, leaving international investors with middling results.

Which is why more and more institutional investors are getting picky about their international exposure by using country ETFs, according to Greg Walker, head of iShares’ Canadian institutional business. Plan sponsors in Canada originally started dipping their toes into ETFs through products that track broad country indexes. Now, however, Walker says they want more specialized exposure and the ability to strip out those underperforming areas. Country-focused ETFs are now more of a focus as pension investors seek targeted access, outside of the broader index. “Plan sponsors are becoming more surgical about their exposures as they seek to distinguish between so-called ‘good’ developed markets and ‘bad’—same with emerging markets.”

It’s not a bad approach, given how the global recovery is shaping up with a mix of rough and smooth patches.

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