Stock ETFs That May Benefit From China Buying Italian Bonds

Includes: IAI, IEZ, IXN, VGK
by: Gary Gordon

Eurozone members have yet to come to a meaningful agreement on how to save weaker countries from sovereign debt defaults. Consequently, Germany has been studying the adverse impact that a default by Greece would have on German banks. Meanwhile, CEOs of French financial institutions can be seen on the talk circuit, claiming that banks in France are well-capitalized and well-insulated. (De Nile is a river in North Africa?)

So far, commentators have skirted around the decimation to European company share prices. For example, when media experts describe the debt crisis and/or the continent’s speed boat to two-year lows, why haven’t they used the ”four-letter” word? Why have people been so gun-shy with regard to saying the word, “bear?”

In truth, European stock benchmarks are indeed wrestling with a polarizing new bear. The Vanguard Europe Fund (NYSEARCA:VGK) has belly-flopped for a -27% return since its 2011 peak. And while U.S. stocks have yet to make up their mind - they’ve only earned the “correction” title thus far - a lot is riding on Europe’s ability/inability to shore up confidence.

Perhaps ironically, U.S. stocks dropped to within a few percentage points of 2011 lows early on 9/12, then ended the day with substantive gains. The 235 point turnaround for the Dow came as a result of news reports that China plans to purchase Italian debt.

Does the market’s initial reaction demonstrate anything about the current environ? It demonstrates that the stock market is literally begging for an excuse to thrive, rather than dive.

Yet investors ultimately require more than rumors. How much will China buy? Is the China Investment Corporation only interested in Italy? Does that mean that the international community has officially given up on Greece? Will China be equally willing to bail out Spain and/or Portugal? Will the purchase of Italian debt be less inspiring or more inspiring than Buffett’s B of A deal? (I guess we will all need to stay tuned.)

There are important flags worth keeping in mind. For instance, when it comes to U.S. equities, institutional investors are focused on the S&P 500’s established trading range of 1096 to 1233. It coincides perfectly with a 10% correction and a new bear (-20%) in domestic stock assets.

That said, if one of the world’s largest sovereign wealth funds (CIC) invests in Italy with both fists, it might be the first batch of spaghetti that sticks to the Wall. And if enough pasta sticks ... stocks that are sensitive to global economic growth might once again attract “risk-on” investment dollars.

Here are three stock ETFs that responded particularly well to the 9/12 news flash:

Stock ETFs That Surged On 9/12 China News
1-Day % Daily Range %
iShares DJ Oil Equip & Services (NYSEARCA:IEZ) 1.09% 3.21%
iShares Global Technology (NYSEARCA:IXN) 0.93% 2.38%
iShares DJ Broker-Dealer (NYSEARCA:IAI) 0.91% 2.98%
S&P 500 0.70% 2.25%

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.