On New ETFs, Sector Investing and Volatility

 |  Includes: CHC, FCX, JIAXF, PHO
by: Roger Nusbaum

A couple of quick items today.

Depending on your level of ETF nerdiness you probably know that First Trust filed for a couple of interesting commodity stock ETFs. Specifically they have filed for a copper ETF and a platinum ETF -- note these are stock baskets not commodity trackers. They will track ISE indexes but the ISE Index page did not have info on these two.

If these funds actually list I think the copper stock fund could be a very popular trading vehicle but I think I am more interested, based in initial impression anyway, in the platinum stock fund. It will cover all the platinum metals, which are platinum, palladium (knew about that one), rhodium (knew about that one too), iridium, osmium and ruthenium (didn't know about those last three).

At this point there is no indication what will be in either fund so lets not put the cart in front of the horse just yet. But while the copper fund will likely be heavy in Freeport (NYSE:FCX) and Jianxi Copper (OTC:JIAXF), and the platinum fund will probably have a couple of South African companies and one or two from Russia, are there any companies that focus on rhodium or ruthenium? I don't know but I guess we'll find out.

The thing here that I think is positive is the specialization. Many people like to make fun of this sort of thing which is unfortunate. Investors can learn about various narrow segments but not be very comfortable picking a stock or two to capture the theme. Even people generally comfortable with stock picking in the context of a narrow portfolio might not want to pick a stock for every single slice of the market they want to own. For example, I'd rather own the PowerShares Water Portfolio (NYSEARCA:PHO) than a stock for that segment.

Moving to a similar subject, I saw this article on Seeking Alpha about a recent IPO called China Hydroelectric (NYSE:CHC). This could be a neat one, as it ties together two things I am interested in: China and hydroelectricity. The company owns 11 plants outright and has a stake in one more. It will be using the IPO proceeds, which were pretty small, to buy another plant. Based on the literature the company is profitable and has been around for a little while. It looks like the market cap started out at about $700 million based on the $16 offering price but is less now because the stock has dropped a combined 17% on both days of trading thus far. If you click through to the Seeking Alpha you can find a few links with more information of varying utility.

OK, here's the thing if you are interested in buying a stock as a proxy for a country that is more volatile than the US -- you might want to think long and hard about buying a stock that is likely to be much more volatile than the volatile country. So China, in general, seems to be a little more volatile than the US, or maybe you think a lot more volatile, and based on the limited trading thus far and the fact that it is a small company that will be transaction oriented, CHC is likely to be more volatile than any of the broad Chinese benchmarks.

The opinion thus far doesn't even get into issue of whether the information provided by the company will be accurate which was raised in the comments of the SA post. It is a lot easier to think about stocks in this context that have around for a while and have a decent following that you can more easily find (be it CNBC Asia or websites). I do not assume anything malfeasant with the company but I do assume a whole lot of volatility. Where possible I try to make the task as easy as possible and a stock like CHC probably does the opposite.