Governments around the world served up stimulus plans at the start of 2009 to pull the world¬†out of its collective slump.¬†With more money to spend on “projects,” the demand for¬†”stuff”¬†surged. As the demand rocketed, the supplier nations… mostly emergers…¬†witnessed¬†exhilarating stock price appreciation.
South Africa, Russia,¬†Brazil, Australia — these were some of the best¬†performing equity markets in 2009.¬†They are¬†countries that export copper, oil, platinum, gas and gold. Even U.S. companies in commodity industries via SPDR Select Materials (XLB) found themselves outperforming companies in other economic segments.
Most of the euphoria centered on increased demand from China. And for a while there, it seemed like you merely needed to ride the Orient Express; that is, if a company or country had materials and resources to sell to China, then you invested in¬†that company or country.
Unfortunately for some, the Chinese began tightening credit¬†roughly 8¬†months ago. And while it is the right policy for the Chinese to curb double-digit GDP growth as well as an increasingly speculative property market, the ripple effect has been palpable; basic industry stocks and¬†emerging markets¬†have experienced sub-par performance ever since.
SPDR Select Materials (XLB) has been one of the worst performing segments over the last 6 months, logging a dismal -5.10%. Market Vectors Agribusiness (MOO) and Market Vectors Hard Asset Producers (HAP) have been even more damaged, checking in with -10.24% and -10.47% respectively. In contrast, the S&P 500 is up about 1%.
More importantly,¬†for those who subscribe to the idea that the future rests in the emerging markets, they may at least wish to be careful about overlap in their portfolios. The correlation matrix below shows just how strong the relationships are when holding commodity/resource/materials ETFs at the same time that you’re holding emerging market ETFs. (Note: In most cases, the emerging market ETFs below showed a correlation coefficient with XLB that was higher than with any other U.S. economic segment.)
|1-Year Correlation Coefficients Between Popular Emergers and Basic Industry ETFs||¬†|
|iShares Emerging Markets (EEM)||0.97||¬†||0.91||¬†||0.96|
|Claymore BRIC Fund (EEB)||¬†||0.94||¬†||0.91||¬†||0.96|
|iShares South Africa (EZA)||¬†||0.94||¬†||0.82||¬†||0.87|
|iShares Australia (EWA)||¬†||0.94||¬†||0.87||¬†||0.93|
|Market Vectors Russia (RSX)||¬†||0.93||¬†||0.91||¬†||0.92|
|iShares Brazil (EWZ)||¬†||¬†||0.90||¬†||0.88||¬†||0.94|
Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above.¬†The company receives advertising compensation¬†from Invesco PowerShares Capital Management, LLC and Geary Advisors, LLC. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc.¬†web site.