The Best Regional ETFs

By now, most investors know why they must own international stocks. Figuring out the best way to diversify your assets overseas, however, presents additional factors and risks to consider, including different international accounting standards, currency fluctuations, and geopolitical events.

Comprehending the banking opportunities of India's HDFC Bank (NYSE: HDB), for example, is much more difficult than understanding the strengths and weaknesses of U.S.-based Wells Fargo (NYSE: WFC).

So rather than spend the extra time researching individual foreign companies, many investors attempt to diversify away the added risks and invest in regional exchange traded funds (ETFs) that hold a portfolio of a single foreign country's stocks. In fact, according to Morningstar, three of the most actively traded ETFs are regional funds -- iShares MSCI Japan (NYSE: EWJ), iShares MSCI Brazil, and iShares MSCI Taiwan.

But pure investor popularity doesn't necessarily translate into a good investment, so we're going to enlist the help of the 95,000 investors participating in Motley Fool CAPS to sort out the good regional ETFs from the rest.

Your top picks
Here are the top five regional ETFs as rated by CAPS investors:

Please bear in mind that these are not formal recommendations. Instead, I offer this list as a jumping-off point for further research. In fact, researching five-star CAPS picks such as these has proved to be an effective tool for investors.

Any surprises?
You might be disappointed if you were expecting to see ETFs that track the popular emerging markets of Brazil, Russia, India, and China. On the other hand, you might be encouraged by their omission. I know I am, as it seems to indicate that CAPS investors eschew simply what's popular and instead focus on fundamentals.

One inclusion that surprised me, however, was the SPDR S&P Emerging Middle East & Africa ETF -- I mean, talk about added political risk! CAPS investors don't seem to mind, though; all 76 players, including 31 All-Stars, who have rated the ETF believe it will outperform the S&P 500.

The ETF has gained more attention on CAPS since it was recommended on CNBC's Feb. 4 edition of Fast Money as a way for U.S. investors to tap the potential of the Egyptian economy.

Yes, the fund does have 7% of its assets invested in Egyptian stocks and another 15% or so in less-liquid frontier markets like Nigeria and Morocco, but over 75% of the assets are invested in the more developed emerging markets of South Africa (58%) and Israel (20%). So while this ETF may be an easy way for U.S. investors to get some exposure to the Egyptian market, it is by no means a pure-play on that country.

Likewise, investors shouldn't expect this ETF to hitch a ride on higher oil prices, as only 5.4% of its assets are invested in energy firms. The fund's largest sector is actually financials at 31% of assets, followed by materials (23%) and telecommunications (10%).

The best way to approach this ETF was summed up nicely by the obvious Ayn Rand fan howeirdroark in November:

I've been awaiting an EMEA [Europe, Middle East, Africa] ETF index...it's nice to have the opportunity to invest in the potential growth of the Middle East & Africa. Obviously, this is an Emerging Market and therefore has it's risks...high risk = high reward. Because I'm young enough (29) I would take the risk, if I was 20-30 years older I would reconsider.

Couldn't have said it better myself. This is not the ETF for volatility-averse investors, so be sure to do extra homework and reconsider your risk tolerance and time horizon before making an investment.

What do you think of the SPDR S&P Emerging Middle East & Africa ETF, or any ETF or stock for that matter? The 95,000 investors on Motley Fool CAPS are waiting to hear what you have to say. To get started, just click here. CAPS is 100% free.