Corruption Conundrum: Some Corrupt Nations Have Great ETFs
Earlier this week, Transparency International, a politically non-partisan organization that tracks international corruption trends, released its annual Corruption Perceptions Index. This year's rankings include 176 nations and territories ranked on a scale of zero to 100.
"A country or territory's score indicates the perceived level of public sector corruption on a scale of 0 - 100, where 0 means that a country is perceived as highly corrupt and 100 means it is perceived as very clean," according to Transparency International.
For investors that frequently play markets outside the U.S., corruption rankings are instructive for several reasons. For example, Argentina ranked 102 in the Transparency International index. That country's anti-free market principles and proclivity for nationalization of industry have put it on the brink of second sovereign debt default this century.
Conversely, all of the countries represented in the Global X FTSE Nordic Region ETF (NYSE: GXF) –- Sweden, Norway, Denmark and Finland –- rank near the top of the corruption index. That is to say they are among the least corrupt nations in the world. In fact, that quartet accounts for half of the top eight spots. Maybe it is not surprising that GXF is up nearly 25 percent this year.
What may come as a surprise to some investors is the performance of some ETFs that track countries that are well into the bottom half of the Transparency International Index. Consider the following:
Global X FTSE Greece 20 ETF (NYSE: GREK) By any account, a 15.8 percent year-to-date gain for the Global X FTSE Greece 20 ETF is a pleasant surprise. Somehow, some way the ETF is trading higher on Thursday, a day after Greece entered selective default on its debt obligations.
Remember, the Transparency International survey ranks public sector corruption. Apparently, Greece is rife with that because the country occupies the 94th spot in the latest index. That is down from 80 last year and good enough to make Greece the most corrupt Eurozone nation in the eyes of Transparency International.
This is how bad Greece looks: It is tied with Djibouti. In terms of countries with ETFs that rank close to but ahead of Greece, Thailand, Peru and China start the list. The corruption rankings for those nations are nothing to write home about, but the reality is those economies have far more potential than Greece's.
Market Vectors Russia ETF (NYSE: RSX) Of the 176 countries and territories that are found on the latest Transparency International index, Russia is the lowest-rated to have a corresponding ETF. The "R" in the BRIC acronym is tied for the 133rd spot with Comoros and Iran, among others. That is not a complement, but the Market Vectors Russia ETF has found its way to a gain of 9.1 percent this year.
Russia and corruption meeting in the same sentence is nothing new. The country is notoriously corrupt and most investors know that. However, knowledge of corruption does not diminish investor risk.
Arguably, Russia's energy sector is its most corruption-laden industry group and much of that comes from the government's heavy-handed approach to how Russian energy firms operate. The problem is that RSX and the other Russia ETFs are heavily allocated to the energy sector.
iShares MSCI Thailand Investable Market Index Fund (NYSE: THD) In the 88th spot, Thailand resides right in the middle of the corruption index. That seems to have bothered investors little because the iShares MSCI Thailand Investable Market Index Fund has gained over 56 percent since 2008 debut. In that time, there has been bloody political protests and regime change. Year-to-date, THD has been a stalwart with a gain of over 30 percent.
Putting Thailand's ranking into context, there are plenty of Asian tiger economies tracked by ETFs with worse corruption rankings. That list includes Indonesia, the Philippines and Vietnam. Translation: Of the emerging Southeast Asian economies with corresponding ETFs, Thailand is the least corrupt.
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