Will QE3 Spur These EM ETFs Higher?
Quantitative easing, no matter the edition, is viewed as an impetus for investors to get involved with riskier assets. Last Thursday's surge in equities and commodities proved as much and it is no secret that QE3 is expected to benefit myriad sector ETFs.
Investors with an eye toward global markets might be wondering if monetary easing in this form can benefit international ETFs, particularly those focusing on emerging markets. It is a relevant question to ask in the wake of the QE3 announcement because plenty of developing markets and the ETFs that track them are correlated to the commodities trade.
Of course, past performance is no predictor of future results, but a look back at how some emerging markets funds performed under QE2 could provide clues for what investors can expect under QE3. Note the QE2 returns mentioned here are from the deployment of QE2 in November 2010 through the completion of the program in June 2011.
iShares MSCI Chile Investable Market Index Fund (NYSE: ECH)
On the basis that quantitative easing should stoke higher commodities prices then QE3 should be good news for the iShares MSCI Chile Investable Market Index Fund. The reason is simple: Chile is the world's largest copper producer.
There is a rub, though. QE3 is an American phenomenon, but it is China that is the 800-pound gorilla in the copper market. China has announced a major infrastructure stimulus program, which could drive ECH higher in the future. China's stimulus, not American easing, is what ECH bulls may need to pin their hopes on because the ETF returned just 3.7 percent under QE2.
On the other hand, the Chilean economy has more to offer than just copper. Home to a vibrant banking sector and improving domestic demand, Chile's central bank recently boosted its 2012 GDP growth forecast while reducing its inflation estimate.
iShares MSCI All Peru Capped Index Fund (NYSE: EPU)
Staying in South America, the iShares MSCI All Peru Capped Index Fund would appear to be another logical beneficiary of QE3. Peru is a major copper producer and one of the world's top gold and silver producers.
EPU's correlation to those precious metals can vary. For example, EPU has outperformed the iShares Gold Trust (NYSE: IAU) and the iShares Silver Trust (NYSE: SLV) by wide margins over the past year. In the past six months, the script has flipped as IAU and SLV have easily outpaced EPU. Still, it is worth noting EPU has already benefited from QE3. The ETF was trading around $42 before the announcement. It now trades over $45. During QE2, however, EPU gave up 4.5 percent.
Market Vectors Russia ETF (NYSE: RSX)
Given Russia's status as the largest non-OPEC oil producer in the world, any and all Russia ETFs would seem to be logical QE3 derivative plays. ETFs heavy on U.S.-based oil and gas producers such as the Energy Select Sector SPDR (NYSE: XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) have performed well in the wake of the QE3 headlines, offering confirmation that Russia ETFs could offer more upside.
The $1 million question is how much upside? That question needs to be answered because in the case of RSX, a case can be made that this ETF was pricing in QE3 before the announcement was made. RSX surged 12 percent in the three months leading up to the QE3 news and has since tacked another five percent. During QE2, the largest Russia-specific ETF added almost 7.5 percent.
iShares MSCI Thailand Investable Market Index Fund (NYSE: THD)
Thailand is not known for being a raw materials export as are the other countries on this list. Additionally, a case can be made that THD is steadier and less volatile than either EPU or RSX. There is a QE3 angle with THD worth noting.
CIMB Research upgraded Thai energy and petrochemicals names today to Trading Buy from Neutral, citing the onset of QE3, Reuters reported. Energy and materials are THD's second- and third-largest sector weights, respectively, combing for over 31 percent of the ETF's total weight. THD gained 6.8 percent during QE2.
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