Is The Bear For Gold-Oriented ETFs Over? | Main | March 16, 2014 – ETF Expert Radio Podcast

The Reappearance Of Resources-Rich Country ETFs

13 March 2014 at 11:22 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

For the better part of three years, investing in mining companies has been an exercise in extraordinary patience. A significant portion of the poor performance is attributable to the slowdown in emerging market growth. Economic weakness from China to Brazil to India has contributed to plummeting commodity prices and fresh lows for industrial metals.

DBB 3 Years

Shares of miners suffered alongside commodity angst. Market Vectors Gold Miners (GDX) had been particularly battered, experiencing price erosion of 65% between May of 2011 and the end of 2013. The broader SPDR Metals and Mining (XME) depreciated 40% in value over the same time period. However, something unexpected may be transpiring. For example, since hitting the post-taper tantrum lows in late June, the SPDR S&P 500 Trust (SPY) appreciated roughly 17%, while XME rallied a more robust 27%. Remarkably, GDX has pole vaulted 30% this year alone. (Read “Is The Bear For Gold-Oriented ETFs Over?”)

An equally intriguing change in sentiment on resources-rich country ETFs may be developing here in 2014. Australia, New Zealand, South Africa, Indonesia — countries where a large percentage of global mining operations occurs — are bouncing back. The iShares MSCI Australia Fund (EWA) had a difficult time amassing less than 2% in 2013; EWA has already garnered a bit more than that this year. Indonesia experienced a bearish 23% decline last year, though the country may be able to credit a link to basic materials for the renewed interest in the first 10 weeks of 2014.

Credit the monstrous drop in the currencies where miners operate. When the Australian dollar or the South African rand or the Indonesian rupiah loses 10%-20% of value against a basket of other world currencies, the instinct to cut unhedged stock losses in those country ETFs is very strong. Nevertheless, valuations of miners and basic materials companies became more attractive as currency depreciation helped augment profitability.

Are Resources-Rich Country ETFs Worthy Of A Second Look?
2013 Approx YTD 2014
iShares MSCI New Zealand (ENZL) 12.5% 12.0%
iShares MSCI Australia (EWA) 1.8% 2.2%
iShares MSCI Canada (EWC) 5.3% 0.6%
iShares MSCI South Africa (EZA) -7.5% -3.0%
iShares MSCI Indonesia (EIDO) -23.3% 15.8%
SPDR S&P 500 Trust (SPY) 32.2% 0.5%

Mining companies may be a whole lot shrewder than some people think. In essence, when commodity prices tank, they often halt projects and cut spending. Shortly thereafter, if currency declines are steep enough, they are able to lower the costs associated with local wages and other expenses as they move forward on projects. In fact, the Wall Street Journal recently noted that several prominent names in the mining world — Rio Tinto, BHP Biliton, Anglo American — reaped their biggest rewards from foreign exchange gains in over a decade.

Granted, the operational benefits of currency declines is not something that materials-oriented companies can “take to the bank.” What’s more, further deterioration of global economic conditions might push commodity prices in a negatively reinforcing downward spiral, much the same way that industrial metals have been unable to get up off the mat. Then again, the recent surge in everything from natural gas to potash to precious metals may benefit the basic resources segment going forward.

Since the first week of January, I have had a number of moderate growth clients in iShares MSCI New Zealand (ENZL). The selection decision primarily came down to attractive fundamentals, the country’s projected gross domestic product (GDP) of 3.4% and the promise of yen/dollar carry traders “going long” on the New Zealand dollar. Still, New Zealand figures prominently in basic materials in much the same way that Australia does. In fact, New Zealand is the highest weighted country in the WisdomTree ¬†Commodity Country Equity Fund (CCXE).

I Year ENZL

You can listen to the¬†ETF Expert Radio Show ‚ÄúLIVE‚ÄĚ, via podcast or on your iPod. You can follow me on¬†Twitter @ETFexpert.

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. Gary Gordon, Pacific¬†Park Financial, Inc., and/or its clients may hold positions in the¬†ETFs,¬†mutual funds, and/or any¬†investment asset mentioned above. The commentary does not constitute individualized¬†investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of¬†exchange-traded products compensate¬†Pacific Park Financial, Inc. or its subsidiaries for advertising at the¬†ETF Expert web site.¬†ETF Expert content is created independently of any advertising relationship.

Share this post:
  • Print this article!
  • Digg
  • Sphinn
  • del.icio.us
  • Facebook
  • Mixx
  • Google
  • E-mail this story to a friend!
  • Live
  • MySpace
  • TwitThis
  • Yahoo! Buzz

Tags | , , , ,


Receive ETF Expert Daily By Email

2 Responses to “The Reappearance Of Resources-Rich Country ETFs”

  1. Mel Helfand says:

    Suggestions for future blogs:

    1. Why VIG instead of SDY?
    2. Why XLV instead of VHT? (both SDY and VHT seem to have better performance)
    3. Your thoughts on Buffet imitators: MOAT and QUAL?

  2. Staff says:

    Mel,

    I have done quite a few stories on VIG, SDY, XLV, VHT over time. In thousands of articles for a general audience, you’re not always going to cover aspects of these assets in the way that an individual reader may like. I can, however, answer some of your concerns here.

    VIG, SDY, XLV, VHT track slightly different indices. And the only performance that matters is the time in which you hold it, not a meaningless 5-year buy-n-hold period… not when investing success is actually based on avoiding the bulk of bearish disasters. I can assure you that neither VIG nor SDY helped you make money from 2000-2009.

    In truth, when I write about VIG or SDY, I am usually talking about the importance of the space… dividend growth. When I am talking about broad health care, both XLV and VHT are applicable. In practice, I use XLV because I require the greater liquidity/trading flexibility as a money manager. But if someone wishes to own health care, VHT is every bit as beneficial for broad exposure.

    On the other topic, investing in so-called wide-moat stocks tends to be in the eye of the beholder… and I am not so sure that MOAT is really imitating Buffett (for better or worse). Everything ultimately comes down to the index method for determining what gets included. With Buffett being a so-called buy-n-hold advocate, it should strike MOAT investors as interesting that the annual turnover is something like 50%. So MOAT may or may not be working for investors who like the concept and the index methodology, but I don’t see the circumstances as imitating what Buffett does.

    Best.

    Gary


Leave a Reply

Free Sign-Up                     ETF Expert RSS Feed  Follow EtfExpert on Twitter

Receive ETF Expert Daily By Email
Get The Weekly ETF Expert Newsletter

Archives