Three Underrated ETF Hotspots

Everyone likes a good list to start a new year. Whether it’s a “Top 10” of this or a “Best of” that, it’s always a fun exercise.

But when it comes to picking stocks, nothing is as easy as it looks. If you’re an investor looking for international exposure, that goes double.

It’s easy to think of the common names. Brazil, Russia, India and China — were all big winners in 2009. But the BRIC countries, for all their pluses, have some minuses, too. China trades at a rich valuation of 35 times earnings, for example, and Russia is utterly dependent on energy.

Drawing from the BRIC well overlooks a lot of opportunity. Turkey, to name one, returned +110% in 2009, far more than India or China and not far from the gains that Brazil and Russia delivered.

Country 2009 Performance P/E
Brazil +130% 22
Russia +117% 22
India +82% 24
China +81% 35
U.S. (S&P 500) +27% 25

Turkey’s not the half of it. A number of international markets show a lot of promise — and this profit potential, thanks to exchange-traded funds (ETFs), has never been easier to access. These baskets of securities trade on U.S. exchanges and offer individual investors instant access to markets that were once the exclusive province of the brokerages’ international desks.

Here are three international markets for 2010 and the best ETFs that track them:

Poland — 2009 performance: +52%
Years of smart fiscal management and steady growth have solidified Poland as the strongest Central and Eastern European economy. About 70% of gross domestic product comes from domestic consumption, which allowed for +5% GDP a growth rate in 2008 while much of the world was mired in recession. When the numbers come in for 2009, the country is expected to post modest growth. If so, it will be the only European Union economy that expanded. Poland’s unemployment has risen, but low manufacturing costs should keep the economic engines running and provide more jobs.

A young and expanding middle class is one of the best things to like about Poland’s economy. About 50% of the population is under 35, and wages have gone up +58% in the past 10 years. This means more people will have more purchasing power, which propels the economy to continued growth.

How to invest: Market Vectors Poland ETF (NYSE: PLND) is the easiest way to get broad exposure to Poland. The fund is 40% weighted in financials, a concentration that includes a few of Poland’s big banks, which should benefit from increased lending as the economy develops and the middle class emerges. Other sectors include energy (14% of assets), industrials (13%), telecom (8%) and consumer goods (5%).

Vietnam — 2009 Performance: +51%
China may yet be the driver of the world’s growth engine, but Southeast Asian countries are getting in on the action, too. Countries like Vietnam have benefited from a spillover in demand for low-cost labor in China. Now the country is a go-to source for low-cost labor thanks to its educated and skilled workforce.

All this helped Vietnam become the second-fastest growing economy in the world in 2008, and it’s also why GDP is expected to grow +6% to +7% annually between 2010 and 2012. The country is still under communist rule, but if you can get past the irony of the stock exchange’s name — the Ho Chi Minh Stock Exchange — it’s pretty clear that, like China, at least some change is in the air.

How to invest: Vietnam is considered a “frontier” market, which means investors must have a stomach for substantial risk, as the stocks tend to be volatile. No Vietnamese companies trade on U.S. exchanges, so the best way to gain exposure is through the Market Vectors Vietnam ETF (NYSE: VNM). About 70% of the market cap of the underlying index is of companies based in Vietnam. The rest are companies that do at least half their business in the country. The fund is weighted toward financials (43% of assets), industrial (26%), energy (25%) and consumer services (4%).

South Africa — 2009 Performance: +68%
What a difference a few years makes. In the 1990s, the world saw South Africa begin to heal the wounds caused by Apartheid. Now, this summer, South Africa will host the biggest single-sport event in the world, the World Cup, and showcase its development to the world.

The development South Africa has undergone is impressive. In 15 years, it has opened its markets for trade, promoted foreign investment, reduced deficits and reined in inflation. It has been rewarded for these efforts with investment-grade government debt, burgeoning banking and telecom sectors and a rising standard of living. All this comes aside from South Africa’s mining industry. The country is largest producer of gold and platinum in the world.

How to invest: Investors can go one-stop shopping for South African equities with the iShares MSCI South Africa Index (NYSE: EZA) ETF. Market Advisor Editor Nathan Slaughter has written extensively on gold’s potential to continue rallying long-term. If you share the same sentiment, EZA is a worth consideration. About 32% of the fund’s weighting is in South Africa’s substantial mining sector with firms like MTN Group (11%), AngloGold (6%), Impala Platinum Holdings (6%) and Gold Fields (4.5%). The country’s promising banking (27%), telecom (11%) and energy (10%) sectors are also represented in the fund.

P.S. Still interested in a “Top 10” list for the coming year? Start with Market Advisor’s. Since 2003, their annual “Top Ten Stocks” report has generated compounded returns of +96.6%. They just released their picks for 2010 yesterday. Check them out.