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Markets

Investment Trap or Opportunity? Germany & Gold Miner ETFs

By Christian Magoon

CEO, Magoon Capital

Contrarian investors are known for their ability to set emotion aside and invest in areas of the markets that are unloved. At their best, contrarians astutely discover treasure among other investor's trash. At their worst they enter an investment trap that continues it downward spiral.

With over 1,500 ETF and ETN products available in the U.S. marketplace, there are many asset classes, strategies and markets represented. Thus, there are always opportunities for the contrarian to consider. Two areas that have the classic combination of emotion and headlines are German stocks and gold mining companies. Both of these market segments are represented by a popular ETF that has lost at least 25% of its value over the last year. Here's the one year NASDAQ chart of the iShares MSCI Germany Index Fund (EWG) and the Market Vectors Gold Miners ETF (GDX).

Market Vectors Gold Miners ETF (GDX)

GDX has been the most successful gold mining ETF in the marketplace. It holds around $8 billion of investor assets, despite losing close to 31% over the last year. Gold mining stocks are an indirect way to play gold prices. In the past gold mining stocks have had a relatively simple relationship to the price of gold. Many view gold mining stocks as a more aggressive, or leveraged, way to invest indirectly in gold versus owning physical gold or gold backed ETFs. This all changed, or is currently in transition, as of just a few years ago. Now gold mining stocks, as represented by GDX, have disconnected from their fairly predictable relationship to the price of gold, as evidenced by the SPDR Gold Trust (GLD). Here's an annotated chart from the NASDAQ Interactive chart center comparing the behavior of GDX and GLD over the last five years. Note the initial close relationship between the two and then the disconnect.

GDX is currently at a fairly wide disconnect versus GLD, as shown in the chart above. Some investors may see that as an opportunity. Others may simply proclaim that any investment based off a relationship between the two ETFs to be foolish. Either way, most investors following gold have a strong opinion on the future of gold mining stocks and the ETFs that track them.

iShare MSCI Germany Index Fund (EWG)

EWG is not the only ETF that invests in German stocks, however it is the only German stock, or even bond, ETF with over $5 million in assets. At $2.5 billion in assets this ETF is the premier way to access German stocks. What stocks are we talking about? Here's a list from the ETF's website of the companies that make up close to 60% of the ETF.

The real reason for this EWG's 25% decline has less to do with the fundamentals of these companies and more to do with the financial chaos in the European Union. With Germany positioned in the cat bird seat economically and financially, markets seem to be split over its near term future. Will German equities be further punished due to EU drama? Or could the chaos subside in a way that allows Germany to be independent or perhaps part of a healthier union? This crisis and the impact it will have on the direction of German markets is highly charged. Clearly the discounting of Germany has begun in the markets. This Monday began the process of discounting Germany on the credit side as Moody's changed its outlook on Germany from stable to negative citing continued EU troubles.

Examining the one year performance chart on EWG compared to its 200 day simple moving average (SMA) one can see the slide Germany initially experienced and the leveling off that has occurred. At a share price of about $19 on Monday EWG is closer to its one year low in the $17 range versus its $27 high. It is also well under its SMA, especially after Monday's market action.

German stocks and gold miners present classic characteristics of both investment traps and investment opportunities. Each market segment has been punished, appears poised to easily rally or plummet and could see even more emotion going forward. All these factors point to performing an investment assessment that is not based off emotion but of careful consideration of the risk and the reward potential of these two unloved ETFs. So all you contrarians out there, time to do your thing.

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.

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GDX GLD EWG

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ETFs Investing Stocks