Stemming from a lack of cross-border diversification,
country-specific ETFs expose investors to some level of political
risk. This holds particularly true in emerging and frontier
For example, the primary reason for the Global X FTSE
Argentina 20 ETF's (NYSE:
) year-to-date loss of almost 21 percent is likely the country's
growing reputation for
hostility towards foreign companies looking to do
However, political volatility does not begin and end with
country or regional ETFs. As Argentina and a number of other
countries have shown in 2012, some sector funds also expose
investors to significant political uncertainty. Below are four of
these politically-sensitive sector funds.
Market Vectors Coal ETF (NYSE:
In regards to politics, the Market Vectors Coal ETF is a curious
case because its political issues stem from the US government,
rather than less stable emerging nation governments. In the US,
2012 is an election year and major coal-producing states such as
Pennsylvania and West Virginia are viewed as swing states. That
means President Obama and Mitt Romney may tell coal miners what
they want to hear in an effort to gain their support.
Talk is cheap. So is natural gas. To this end, natural gas, an
abundant commodity in the U.S., burns more cheaply than coal.
Natural gas has political momentum, but it does not mean death
for KOL and its constituents. This political momentum may mean,
however, that U.S. coal companies will become more dependent on
exports to emerging markets as profit drivers. Granted, that
shift might only be possible if Chinese and Indian economies hit
on all cylinders - a premise that is not currently occurring.
Global X Silver Miners ETF (NYSE:
Approximately two-thirds of SIL's country weight goes to
companies based in Canada, the U.K. and the U.S. As a result, the
home docile of many of SIL's holdings may not be a source of
significant political instability. Instead, silver miners may
face political instability where they go to extract the white
A generous assessment says
three of the top-10 silver-producing
are politically risky. That trio is Russia, Bolivia and
Argentina, though some would argue and Peru and China belong are
politically volatile as well. Within the list of the top-20
silver-producing nations, at least five others could be
considered less-than-trustworthy at the political level.
Pan American Silver (NASDAQ:
), SIL's fourth-largest holding, is
facing some political headwinds in Argentina
. This news highlights common risks involved with the production
of precious metals.
ETFS Physical Palladium Shares (NYSE:
Russia and South Africa dominate global palladium production. In
2009, the pair produced 85 percent of the world's palladium. Each
presents investors with a different set of
Of the palladium duo, Russia may be the more concerning. The
country's palladium export data could be questionable. This
forces many market participants to analyze Swiss customs data.
Switzerland is a major hub for precious metals trading in
Beyond that, Russia may not be forthright regarding its
palladium stockpiles. Assuming Russia has larger stockpiles than
traders believe it has, the country could flood the market if
palladium prices surge. Or, Russia may not want others to know if
its palladium stocks are quite low. The country might withhold
this information because its release would likely lead to a
sudden jump in prices.
Both scenarios are speculation, but Russia's secretive nature
regarding its palladium reserves only increases palladium price
iShares S&P Global Energy Sector Index Fund (NYSE:
Of course, at least one oil ETF deserved to make this list. As is
the case with SIL, the bulk of IXC's component companies are
based in civilized, Western nations, such as the U.S. and the
U.K. For oil equities, investors might be more concerned about
where these companies go to generate profits.
Exxon Mobil (NYSE:
), the largest U.S. oil company, is IXC's largest holding with a
weight of almost 16 percent. The company is embarking on a
massive $500 billion deal in the Russian Arctic with OAO Rosneft.
That anecdote only scratches the surface of the unsavory places
global oil companies have to go to find crude.
Chevron's problems in Latin America, specifically Brazil and
Ecuador, are well-documented. Royal Dutch Shell's (NYSE: RDS-A)
assets and staff in Nigeria have been regular targets of rebel
attacks. BP (NYSE:
) and Total (NYSE:
), among other IXC holdings, are looking to expand their Libyan
footprints. Anadarko Petroleum (NYSE:
) does business in Ghana, Liberia and Mozambique, among other
The realities of the oil business dictate that oil majors
search far and wide for new reserves. This search often requires
these companies to travel to politically volatile places.
Investors would be prudent to acknowledge these political risks
before buying oil-related stocks or ETFs, such as IXC.
For more on international ETFs, click
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