Markets

4 Country ETFs to Gain from Oil Price Crash

Without a modicum of doubt, oil has been the hottest and worst hit commodity this year. This is because it has been caught in a nasty web of persistent weakness in demand and global supply glut sending prices to a multi-year low. Notably, U.S. crude plunged to the lowest price of $34.42 per barrel since 2009 while Brent slumped to a level as low as $36.05 not seen in 11 years.

Oil production has risen all over the globe with the Organization of the Petroleum Exporting Countries (OPEC) continuing to pump near-record levels, and higher output from the likes of U.S., Iran and Libya. Additionally, the strengthening U.S. dollar backed by a rate hike is making dollar-denominated assets more expensive for foreign investors and thus dampening the appeal for oil. Further, the U.S. lifted bans on crude oil exports, which have been in place for 40 years. This has also been weighing on prices lately.

On the other hand, demand for oil across the globe looks tepid given slower growth in most developed and developing economies. In particular, persistent weakness in the world's biggest consumer of energy - China - will continue to weigh on the demand outlook (read: No Respite for Oil and Energy ETFs in 2016? ).

While the crash has crushed a number of oil producers and key oil producing countries raising fears of global deflation, it is at the same time benefiting the oil consuming nations. After all, lower oil prices make up a big chunk of either tax revenues or GDP growth opportunities (and sometimes both) in big oil importing countries. Additionally, persistent weakness has made oil extremely cheap for the countries that import them. It will lead to an expansion in balance of payments, increase output and reduce inflation in these countries, thereby paving the way for overall economic growth.

We have seen this happen in a number of countries over the past one year and, with the advent of ETFs, these nations are easier to play. In light of this, we have highlighted four country ETFs that could see smooth trading in the months ahead should oil price fall or remain below $50 per barrel.

iShares India 50 ETF ( INDY )

Lower oil prices are benefiting India the most as it is the world's third largest importer of crude oil, accounting for two-thirds of crude oil requirements. It is tempering the country's inflation, which tends to rise during a period of growth, and increasing consumer power for both spending and savings. This suggests good times ahead for the country as well as Indian ETFs in the coming months (read: Top-Ranked ETFs to Tap India's Growth Story ).

INDY is a large cap centric fund that provides exposure to the largest 53 Indian stocks by tracking the Nifty 50 Index. It is pretty well spread out across components with none of the securities holding more than 7.86% of assets. With respect to sector holdings, financials takes the top spot at 31%, closely followed by information technology (17%), consumer discretionary (11%) and energy (10%). The product has managed assets worth $758.2 million and trades in good volume of more than 326,000 million shares a day. It is a high cost choice in the space, charging 93 bps. The product has a Zacks ETF Rank of 2 or 'Buy' rating with a Medium risk outlook.

IShares China Large-Cap ETF ( FXI )

China overtook U.S. early in the year to become the largest importer of crude oil in the world. As China is the world's most populous country and has a rapidly growing economy, the demand for oil consumption has been on the rise. The country imports nearly 60% of the crude it consumes. The best way to invest in China is through FXI, a product that has over $5.4 billion in assets (see: all Emerging Asia Pacific ETFs here ).

This fund provides exposure to a basket of 51 Chinese large cap stocks by tracking the FTSE China 50 Index. The product is extremely liquid, trading in volumes of more than 26.8 million shares a day and charges 73 bps in fees per year from investors. The ETF is largely concentrated in its top five holdings with nearly 39% of total assets. In terms of sector holdings, financials dominates the fund with 53% share while telecom, oil & gas, and technology provide a decent mix in the portfolio. The fund holds a Zacks Rank of 3 or 'Hold' rating with a High risk outlook.

WisdomTree Japan Hedged Equity Fund ( DXJ )

Lower oil price has been a blessing for Japan too as the country is heavily dependent on fossil fuels after the tsunami in 2011. The oil price slide also came at the right time when the weaker yen was hurting Prime Minister Shinzo Abe's reform policy - Abenomics - which aimed at pulling the country out of two decades of deflationary pressure and returning it to growth. Lower oil price has reduced import bills, improved Japan's trade balance and boosted GDP growth. This in turn is leading to higher consumer confidence and wages. Notably, 84% of the country's energy requirements are met through imports.

Investors looking to tap the benefits of lower oil price but wary about a weak yen could find DXJ a compelling choice. With AUM of $15.9 billion, this ETF targets the Japanese equity stock market without the currency risk by tracking the WisdomTree Japan Hedged Equity Index. Holding 315 stocks in its basket, the product is moderately concentrated across securities with each holding less than a 5% share. Consumer discretionary and industrials take the top two spots with 24.9% and 22.9% share, respectively, while information technology and financials round off the top four. The fund trades in solid volume of 6.2 million shares per day and charges 48 bps in annual fees. It has a Zacks ETF Rank of 2 with a Medium risk outlook (read: 11 Most Popular Currency Hedged ETFs ).

iShares MSCI South Korea Capped ETF ( EWY )

Due to scarce resources, South Korea too relies heavily on oil imports with about 97% of its energy needs. Falling oil price has been bolstering the Korean economy in terms of higher consumer spending and reduced import bills. In fact, the economy expanded 2.6% in the third quarter, representing the biggest growth in five years. Investors could focus on this economy (Asia's fourth largest) through the proxy $3.2-billion EWY, which is the most popular and liquid option to track the country's equity space.

The ETF follows the MSCI Korea 25/50 index, holding 109 stocks in its basket. Samsung dominates the fund's return at nearly 20.5% while the other firms hold no more than 3.8% of assets. From a sector look, information technology accounts for nearly one-third share while consumer discretionary, financials and industrials round off the next three spots with double-digit allocation each. The fund trades in an average daily volume of about 3 million shares and charges 62 bps in annual fees. It has a Zacks ETF Rank of 3 with a Medium risk outlook.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

ISHARS-SP INDIA (INDY): ETF Research Reports

ISHARS-CHINA LC (FXI): ETF Research Reports

WISDMTR-J HEF (DXJ): ETF Research Reports

ISHARS-S KOREA (EWY): ETF Research Reports

To read this article on Zacks.com click here.

Zacks Investment Research

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

INDY FXI DXJ EWY

Other Topics

ETFs

Latest Markets Videos

    Zacks

    Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

    Learn More