Some AAA-Rated Country ETFs Got an F in Q2

A country's sovereign debt rating applies to its bonds, but since credit markets lead equity markets, it might be reasonable to assume that investing in a country with the prestigious AAA credit rating offers some level of safety.

As has been noted, membership in the AAA club has been dwindling. Some of the world's largest economies, including the U.S., Japan and the U.K. can no longer lay claim to the highest possible credit rating.

That has not mattered to equity investors this year because the U.S. and Japan are the best-performing developed markets in the world while some AAA markets have been laggards, particularly in the second quarter. Just look at the following ETFs.

iShares MSCI Hong Kong ETF EWH
The iShares MSCI Hong Kong ETF was something of a surprise in the second quarter...a surprise that the ETF did not perform even worse than it did. EWH, the largest Hong Kong ETF, lost seven percent in June alone on fears about the strength of China's banking system.

Liquidity issues within the Chinese banking system are an epic concern for EWH because the ETF allocates over 60 percent of its weight to bank stocks. Still, it is somewhat surprising that the ETF only lost seven percent last quarter and is "just" down eight percent year-to-date.

iShares MSCI Singapore ETF EWS
Like EWH, the iShares MSCI Singapore ETF tracks an AAA-rated Asian nation and like EWH, EWS has been afflicted by its own separate set of circumstances. EWS has something else in common with EWH: Slack second-quarter and year-to-date performances.

As the lone AAA-rated developed market in the ASEAN group, Singapore has previously been a source of allure for conservative investors looking for a non-emerging markets avenue for tapping into various Asian growth stories. EWS lost 7.5 percent last quarter so investors should be careful before being seduced by the ETF's trailing 12-month yield of almost four percent.

The good news? Singapore's Straits Times Index is trading at a PE ratio of 11.7 and Goldman Sachs sees 19 percent upside through next March, according to CNBC.

iShares MSCI Australia ETF EWA
On this list, the iShares MSCI Australia ETF is by far the worst performer as Australian stocks have been hammered by declining commodities prices and demand and slack economic data from China, Australia's largest trading partner. Then there is the matter of the tumbling Australian dollar, which has proved to be no help to equities there.

EWA lost 16.6 percent last quarter and now has a 30-day SEC yield of nearly four percent. Before jumping in, consider that Prime Minister Kevin Rudd's ascension back to power last week is seen by some market observers as a near-term stumbling block for Australian stocks.

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