Not even full month into the new year and an arguably
surprising theme has been seen with emerging markets
that track nations viewed as raw materials plays. The theme being
that some of these ETFs have shown little correlation to price
action in the commodities traders view the ETFs as often being
highly correlated to.
Interestingly, this theme is playing out to the advantage of
some ETFs and to the disadvantage of others. Said differently,
some emerging markets funds that have a reputation for being
highly correlated to a particular commodity are outperforming
that commodity by wide margins.
On the other hand, there is at least one noteworthy emerging
markets ETF that has commodities correlation reputation that is
lagging not one, but two of the commodities produced by the
nation the fund tracks.
Additionally noteworthy is the fact that this is not a new
theme. Nearly a year ago, the link between some
some emerging markets ETFs and commodities was
and the intimacy is not always as high as some investors believe
it to be. There is further evidence of that being the case again
this year, starting with the...
iShares MSCI Chile Investable Market Index Fund (NYSE:
) It is fair to say a lot of folks know that Chile is the world
largest copper-producing nation. That leads to a simple thesis
that Chilean equities and ECH are held hostage by Chinese copper
demand. With the Chinese economy improving, the thought is copper
prices should be rising and that should be good news for ECH.
To be sure, rising copper prices would be good news for Chile,
but ECH only allocates 14.6 percent of its weight to material
stocks. Two other sectors - utilities and financials - are more
prominent within this ETF.
Here is the deal: Spot copper prices are actually
slightly lower today than where they started the
. At the start of trading today, the iPath DJ-UBS Copper TR
Sub-Index ETN (NYSE:
) was contending with a small year-to-date loss. On the other
hand, ECH is up 4.5 percent to start 2013, easily outpacing JJC
and the iShares FTSE China 25 Index Fund (NYSE:
) along the way.
iShares MSCI South Africa Index Fund (NYSE:
) South Africa's status as a major gold producer, the largest
platinum-producing nation and the second-largest palladium
producer behind Russia means EZA is often viewed as a materials
play as well. Indeed, its allocation to that sector is higher
than ECH's at 17.6 percent, but that is barely more than the ETF
allocates to consumer discretionary names and well below the
fund's weight to financial services stocks.
Earlier this month, Fitch Ratings downgraded South Africa's
long term foreign currency credit rating to BBB from BBB+, the
long term local currency credit rating to BBB+ from A and the
short term credit rating to F3 from F2, citing rising political
and social tensions as reasons for the downgrade.
Those issues, among others, have pressured EZA this year as
the fund is off nearly nine percent, including today's loss. That
also means the ETF has shown no correlation at all to platinum
and palladium. The ETFS Physical Platinum Shares (NYSE:
) and the ETFS Physical Palladium Shares (NYSE:
) are up 7.8 and 4.7 percent year-to-date, respectively.
iShares MSCI All Peru Capped Index Fund (NYSE:
) The iShares MSCI All Peru Capped Index Fund represents an
interesting example regarding the correlations between emerging
markets ETFs and commodities prices, particularly compared to ECH
Here is why. Not only is Peru a major producer of gold, silver
and copper, but that is accurately reflected within EPU as
materials stocks represent over 49 percent of the ETF's weight.
Since EPU reflects Peru's status as a major metals producer, the
ETF has recently been sensitive to slack price action for some
touching a new 52-week high on January 17
, EPU has lost almost 4.7 percent, including today's loss. Over
that same time, JJC is about flat while the SPDR Gold Shares
) and the iShares Silver Trust (NYSE:
) have both traded lower, indicating gold and silver prices may
be weighing on EPU.
Interestingly, EPU recently moving lower in unison with GLD
and SLV stands in stark contrast to what was seen among that ETF
trio in 2012. Yes, all three closed the year in the green, but
GLD and SLV offered nowhere the 16.5 returns generated by EPU.
Specific to EPU, the commodities/ETF relationship is worth
monitoring as 2013 unfolds. Peru is South America's fast-growing
economy, but EPU may need the support of higher metals prices to
deliver further upside this year.
For more on ETFs, click
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