Let’s be frank… vibrant emerging market growth is being held in check by developed world stagnation. Meanwhile, developed world central banks want to improve their economic prospects, and have subsequently chosen to devalue their respective currencies.
So for example, the Fed has chosen to reduce the value of the not-so-mighty “buck” via quantitative easing. What happens? Emerging market stock ETFs benefit because the component companies in those ETFs earn profits in more valuable currencies like the rupee, rand or “real.” Similarly, commodity prices go up because commodities are priced in U.S. dollars. Moreover, if developed world central banks are actually successful in reflating their own economies, overall demand for commodities increases even as supply remains steady.
With the dollar falling 12%+ since June, the last 5 months have been monstrously profitable for emerging market investors. And I admit… I’m as guilty as the next when it comes to fanning the emerging market flames. (Nor have I been shy about addressing the reasons for my hard asset advocacy.)
Perhaps unfortunately, we may be getting to the point where the mob tries to play catch-up; that is, money from the sidelines could start chasing the highest percentage gainers, whether it’s Silver (SLV), Copper (JJC), Thailand (THD), Turkey (TUR) or Peru (EPU).
I’m not saying that it’s too late to allocate. (It may, however, be smart to wait for pullbacks.) I am saying that you might want to look to alternative ETF beneficiaries of emerging market consumption.
What do I have in mind? Consumer goods (a.k.a. consumer staples). Nearly every single consumer goods fund is hitting 52-week peaks… and with remarkably less volatility than the overall U.S. market or most emerging markets. Moreover, they’re beating the market on a year-over-year basis.
|Consumer Staples ETFs: Year-Over-Year Gains|
|PowerShares Food and Beverage (PBJ)||20.8%|
|iShares DJ Consumer Goods (IYK)||15.7%|
|iShares Global Consumer Staples (KXI)||15.2%|
|First Trust Staples Alphadex (FXG)||13.4%|
|Rydex Equal Weight Staples (RHS)||12.7%|
|Vanguard Consumer Staples (VDC)||12.6%|
|SPDR Select Consumer Staples (XLP)||11.3%|
|S&P 500 SPDR Trust (SPY)||10.4%|
Why are consumer staples ETFs a less volatile play on potential success for emerging markets? For one thing, many of the largest multinational consumer corporations already have a major foothold in emerging countries. If you’ve ever visited Thailand, Malaysia, Chile or Turkey, you might marvel at the brand name recognition for the products of companies like Pepsico, Unilever, Coca-Cola, General Mills and Heinz.
Secondly, scores of consumer staples companies earn 20%-30% of their profits in emerging markets and in those emerging market currencies. Basically, the falling dollar can actually help the earnings stories for those major multinational corporations. And that may be a good thing here in Q3 earnings season.
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 web site. ETF Expert content is created independently of any advertising relationships.