Rand's Wild Ride Plaguing Mining ETFs
Amid labor strife at South Africa's gold, diamond, palladium and platinum mines, the country's rand currency has been plunging. Standard & Poor's paring South Africa's credit rating by one notch to BBB with a negative outlook last week did not help matters for the commodity currency. Over the past month, the rand has been one of the worst-performing of the so-called exotic currencies. The WisdomTree Dreyfus South African Rand Fund (NYSE: SZR) is off about 5.1 percent since September 17.
The faltering rand is not just bad news for SZR. Rand woes have plagued previously resurgent precious metals mining ETFs. The iShares MSCI South Africa Index Fund (NYSE: EZA) has outperformed the currency fund by about 200 basis points over the past month, but EZA is not a pure materials/mining play. While those sectors are vital to South Africa's economic output, this Africa's largest economy. To that end, EZA offers some level of sector diversity as financials account for 25.5 percent of the fund's weight.
At 18.4 percent, materials names barely outpace the allocation given to consumer discretionary issues. Pure mining ETFs have not been so lucky during South Africa's labor woes.
As Index Universe astutely points out, mining ETFs with significant weights to South Africa have been decked by the rand's demise.
The Market Vectors Gold Miners (NYSE: GDX), the largest gold miners ETF with almost $9.7 billion in assets under management, features an allocation of 11.2 percent to South Africa. That fund has lost 2.4 percent in the past month. The new iShares MSCI Global Gold Miners Fund (NYSE: RING) devotes nearly 10 percent of its country weight to South Africa and that ETF has slipped 4.7 percent in the past 30 days.
Should South African labor strife continue and show no signs of abating, currency traders will be all the more inclined to punish the rand. That proposition does not bode well for the likes of GDX and RING, but those are not the only ETFs under pressure by way of the faltering rand.
The Global X Pure Gold Miners ETF (NYSE: GGGG) features a 14.6 weight to South Africa. As a result, that ETF has slid almost three percent in the past month. However, neither GDX, GGGG nor RING are the most victimized ETFs due to the rand's decline. SZR, the ETF that tracks the currency, is not, either.
For all the talk about the rand's impact on shares of gold miners and the corresponding ETFs, it cannot be forgotten that South Africa is the world's largest platinum producer and the second-largest producer of palladium behind Russia. To that end, it probably is not surprising that the First Trust ISE Global Platinum Index Fund (NASDAQ: PLTM) has plunged 14.7 percent in the past 30 days.
PLTM focuses on companies that mine metals from the platinum group, which includes platinum, palladium, osmium, iridium, ruthenium and rhodium. These firms are often smaller by market value and feature higher betas than gold miners. The median market cap of PLTM's holdings is just $365 million, but the fund has a weight of 38.4 percent to South Africa.
Those two factors are enough to make PLTM vulnerable to ongoing negative headlines from South Africa.
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