If one focused his/her attention solely on year-to-date performance, he/she might eschew foreign stock ETFs altogether. With the S&P 500 SPDR Trust (SPY) and the iShares S&P Mid-Cap 400 (IJH) garnering 18% and 22% respectively, who needs to dabble in emerging markets? After all, Vanguard Emerging Markets (VWO) registered a dismal 9-month showing of -8%.
Think about the discrepancy for a moment. Stock assets around the globe have a tendency to move in the same direction. Yet broad-based emerging market ETFs have been a drag on investment portfolios. And there’s more. During the 10/2002-10/2007 bull market period, emerging market equities provided 3x the upside of their U.S. counterparts. In complete contrast, over the last two years, U.S. stocks have provided 3x the upside.
On the other hand, if one looks beyond recent disappointments, as well as record ETF outflows in August, the reemergence of emerging markets may soon become the hot story. Not only did broad gauges like VWO appear to bottom out in late August, but resources-related ETFs skyrocketed on a 3-month basis.
|Are Resources-Based ETFs Back From The Grave?|
|3 Mon %||1 Year %|
|Guggenheim BRIC (EEB)||20.2%||3.9%|
|Market Vectors Steel (SLX)||19.5%||5.8%|
|First Trust Natural Gas (FCG)||17.8%||10.4%|
|iShares MSCI Brazil (EWZ)||16.3%||-6.9%|
|iShares MSCI Australia (EWA)||14.5%||13.3%|
|Market Vectors Russia (RSX)||13.7%||2.0%|
|Guggenheim Global Timber (CUT)||13.6%||35.5%|
|iShares S&P Global Materials (MXI)||12.9%||3.6%|
|iShares MSCI South Africa (EZA)||12.6%||-1.3%|
|Market Vectors Coal (KOL)||10.9%||-16.8%|
|iShares S&P 100 (OEF)||4.2%||15.8%|
Sentiment regarding emerging markets and resources-based assets, has been improving for several reasons. For one thing, both China and Europe may be turning a bit of a corner; economic data from both regions have improved; economic downturns are either stabilizing and/or demonstrating legitimate signs of expansion. This gives many of the exporters of basic materials and natural resources, companies as well as countries, a reason to be optimistic. Secondly, the Federal Reserve is likely to be more deliberate, and perhaps more slow, about tapering its bond purchases. This may give emergers a bit of wiggle room with respect to a global environment that is more stimulus-friendly. Finally, fund flows in September did not merely go into broad market U.S. assets; developed Europe-Asia, undeveloped emergers as well as resource-heavy investments began to see significant ETF inflows as well.
Not surprisingly, then, even the U.S. SPDR Select Sector Basic Materials Fund (XLB) demonstrated enormous Q3 resilience. It was the best performing sector ETF in the SPDR Select Sector series from 7/1-9/30 with a pick-up of 9.5%. Some have suggested that the results demonstrate a return to fundamental value as opposed to momentum alone.
From a relative strength standpoint, I have more confidence in Natural Gas (FCG) to carry on its momentum. From a valuation standpoint, Coal (KOL) may prove to be an exceptional bargain. Coal has been so unloved for so long, the July lows may have ushered in a new season for producers of the globally used resource.
Disclosure: 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 website. ETF Expert content is created independently of any advertising relationships.