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Turkey: ETF or individual ADRs?

The Turkish ETF has been one of the best-performing single-country funds so far this year, with year-to-date returns of over 22%. But has the fund’s diversity helped or hurt?

TUR (quote) is both bank-heavy and extremely concentrated, with 62% of its holdings tied up in its top 10 holdings.

However, there are only five Turkish stocks that trade regularly in ADR form, so TUR definitely gives U.S. traders access to companies they would otherwise not be able to get into without a foreign brokerage account.

The question is whether the 89 non-ADR stocks in TUR have been worth the relatively high (0.65%) expenses that this ETF charges. If so, investors are getting value from the fund. If not, then they might be better off simply buying the ADRs.

Turkish ADRs have had a great year

The ADRs account for about 38% of TUR’s holdings.

Top holdings Turkiye Garanti Bankasi (TKGBY, quote) and Akbank (AKBTY, quote) between them add up to 24% of the fund immediately — almost half of its total financial allocation in only two stocks. As it happens, both of these banks have done extremely well so far this year, up 43% and 31%, respectively.

Brewer Anadolu Efes Biracilik (AEBZY, quote) brings in another 3.93% of TUR and a 20.8% YTD return.

Industrial conglomerate KOC (KHOLY, quote), up 30% YTD, weighs in at 3.4% of TUR, and Turkcell (TKC, quote), at 7.04% of the portfolio, is down minimally on the year.

Even though these five stocks add up to less than 40% of TUR’s holdings, they generated more than half of the fund’s performance so far this year. In other words, the 60% of the Turkish market that TUR does a great job in making available to U.S. investors has underperformed by a substantial margin.

It is true that TUR opens up some additional bank exposure and some great industrial opportunities that just are not available in ADR form: refiners like Tupras, manufacturers like Haci Omer Sabanci, convenience store chains like BIM.

But if you had simply applied TUR’s relative weightings to the five ADRs and skipped everything else, the five-stock portfolio would have generated a 31% return so far this year . . . essentially a 10 percentage point outperformance after fees.

Granted, an index fund like TUR is not about stock picking, but about diversity and the ability to track a wide market. But so far, while TUR has done great on an absolute basis, it has failed to track the official Turkish XU100 index, which is up 26% so far this year.

Eventually, global capital will drill down into the Turkish market and then those 89 non-ADR holdings in TUR will outperform. That simply has not happened yet.

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