Wealth Finance

There are many ways to lose money investing in foreign markets—there’s currency risk (watch out for a falling euro), country risk (Greece!) and the risk that a nation’s leader will mess with its markets (hello, Hugo Chávez).

But many investors might be surprised to learn exchange-traded funds that invest in a single country often have yet another risk: They can be heavily weighted toward just a few stocks.

Many countries don’t have as many stocks to begin with, so a single-country ETF—a basket of securities packaged to trade as one stock—often loads up on the biggest companies available. The iShares MSCI Belgium Investable Market Index fund, for example, has almost a quarter of its holdings in the brewer Anheuser-Busch InBev. “You’re actually introducing more company-specific risk into your portfolio,” says Brett D’Arcy, chief investment officer of financial-planning firm CBIZ Wealth Management.

The result: One floundering company can cause headaches for investors in a single-country ETF. For the first two months of 2010, as Toyota Motor was dealing with its massive car recall, its stock lost nearly a fifth of its value. And since the carmaker is the largest holding in the iShares MSCI Japan Index fund, Toyota almost single-handedly sent the value of that ETF down 6 percent over the same time period.

Dina Ting, a portfolio manager for iShares—which has more than two dozen single-country ETFs—acknowledges that country-specific ETFs aren’t diversified if a handful of companies represent a large share of the market value in a country. Still, she says, “any investor would be able to see what our holding is, so there are no surprises.” And it works the other way, too: If an ETF is skewed toward one stock, it would do quite well if that stock’s price popped.

With some 30 country-specific exchange-traded funds on the market and more on the way, analysts suggest studying a single-country ETF’s holdings before buying. Investors can also watch for boiler­plate language in the prospectus indicating that the ETF is “non­diversified,” meaning more than 5 percent of its holdings can be concentrated in a single stock.

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