Emerging Markets: A Commodities Vs. Country Fund Examination (RSX, ECH, EZA)
Many emerging markets are net exporters of a particular raw material or commodity and in the case of some emerging market, several raw materials. For example, Brazil is known as one of the largest iron producers in the world and Latin America's largest economy is also a major coffee and oil exporter. Russia, not Saudi Arabia, is the world's largest oil producer.
Those are just two examples and given that the list goes on, we got to wondering: What's better? An equities-based emerging markets ETF or a commodities ETF or ETN that tracks the commodity a country is most known for? As one example, we wanted to know if it would be better to own the Market Vectors Russia ETF (NYSE: RSX) or an oil futures ETF.
In 2012, the answer depends on the commodity and it depends on the emerging market. Let's see what works better with the following emerging markets: Stock-based ETF or commodities funds.
Market Vectors Russia ETF (NYSE: RSX) As we just said, we wanted to see how RSX stacked up against an oil ETF, so we compared its performance against the United States Brent Oil Fund (NYSE: BNO). But Russia is also a major producer of platinum, palladium and nickel and since there are ETFs and ETNs tracking those commodities, we threw them into the mix as well.
To this point in 2012, RSX has not only outpaced BNO, but the iPath DJ-UBS Nickel TR Sub-Index ETN (NYSE: JJN), the ETFS Physical Platinum Shares (NYSE: PPLT) and the ETFS Physical Palladium Shares (NYSE: PALL). In the case of all but PPLT, RSX's margin of outperformance is quite wide.
iShares MSCI Chile Investable Market Index Fund (NYSE: ECH) Chile is primarily known for exports of one commodity: Copper. And some folks like to imply there is an intense correlation between ECH's performance and the price of copper. Not in 2012. The iPath DJ-UBS Copper TR Sub-Index ETN (NYSE: JJC) is up 8%, but ECH is up nearly double that.
In fact, in the past year, past two years and past five years, ECH and JJC share hardly any correlation at all. That might be because less than 19% of ECH's weight is devoted to materials stocks. Yes, Dr. Copper is important to Chile's economy, but it may not be as important to ECH as some pundits would lead us to believe.
iShares MSCI South Africa Index Fund (NYSE: EZA) If EZA is going to share correlations with any commodities, it's going to be gold and platinum. Fair enough, but PPLT has really outshone EZA this year and the lone South Africa ETF has merely performed in line with SPDR Gold Shares (NYSE: GLD). iShares' own Russ Koestrich recently said "South African equities are relatively expensive compared to other emerging markets" and "certain economic conditions in South Africa aren't all that great" while noting the country has somewhat high inflation.
iShares MSCI Peru All Capped Index Fund (NYSE: EPU) EPU has already pleasantly surprised to to the upside this year and part of that bullish run has probably been fueled by rising metals prices. Peru is a major copper, gold and silver producer.
EPU has outperformed GLD and JJC year-to-date, but the iShares Silver Trust has been better than the lone Peru ETF. Unlike ECH, EPU does feature a heavy weight to materials stocks at over 56% of the fund's weight.
Global X FTSE Colombia 20 ETF (NYSE: GXG) We've long been fans of this ETF. Colombia was once known for another export that we won't mention here in the essence of keeping this is a family program, but today Colombia is a major, legitimate commodities play.
Rising oil production aside, GXG has outperformed the Market Vectors Coal ETF (NYSE: KOL) and JJC this year. And yes, Colombia is still a major coffee producer, but it's a good thing GXG isn't highly caffeinated because the ETF has left the iPath DJ-UBS Coffee TR Sub-Index ETN (NYSE: JO) in the dust this year.
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