ETFs in Focus After Natural Disasters

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 |  Includes: EWJ, VPL
by: Larry MacDonald

Our thoughts today are with the people of Japan and other nations hit by the earthquake and tsunami. Let’s hope there is minimal loss of life and damage.

When natural disasters strike, stock markets in affected countries often sell off sharply. Indeed, stock-market legend Jesse Livermore made his first big killing in the market by having the good fortune to be heavily short Union Pacific (NYSE:UNP) shares just days before the California earthquake of 1906 (and adding to the position as the news spread).

But the ensuing reconstruction effort delivers a massive fiscal stimulus that helps the economy and stock market to recover. Take the case of the earthquake-tsunami that struck Indonesia in late 2005. As the reality of the rebuilding efforts settled in, the Aberdeen Indonesia Fund Inc. (NYSEMKT:IF) climbed steadily over the following months, to triple in value by the fourth month or so.

If history is any guide (and depending on the extent of the rebulding effort required) an investor could now do well with a long position in exchange-traded funds like the Vanguard Pacific (NYSEARCA:VPL) or iShares MSCI Japan Index (NYSEARCA:EWJ).

As an aside, it’s interesting to see the action in stocks of companies with business lines connected in some way to natural disasters. Two cases are Taylor Devices Inc. (NASDAQ:TAYD) and Sutron Corp. (NASDAQ:STRN).

Taylor, a maker of “shock absorber” technology that protects buildings, bridges, and other structures from earthquakes, jumped 50% immediately after the Indonesian episode. Ahead of today’s market opening, it was up 35%. Sutron, a maker of tide stations that detect storm surges and tsunamis, was up 15% in before-market trading today.