Market Overview

China's Materials Gambit Exposed, Play These ETFs


The World Trade Organization says China isn't playing nice or fair with its raw materials exports. As if that's stunning news, but on Monday the WTO did uphold an earlier ruling that said China has violated violated international trade rules for restricting exports on nine raw materials.

Of course, anyone that follows the rare earths sector knows something about China not being too liberal with its exports. Apparently, that stance extends to more than just rare earths.

Monday's ruling affects China's exports of certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorous and zinc, the Associated Press reported. Whether or not the WTO ruling gets China in a sharing mood remains to be seen, but in the meantime, consider the following ETFs on the assumption China will be forced to play a more honest materials exporting game.

Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) One place where China clearly doesn't place with its exports is the rare earths space, but that didn't translate to a good performance for REMX last year. In fact, REMX was an utter disappointment last year. On the bright side, REMX is up about 18% year-to-date and an improving global economy could buoy the rare earths demand story.

Market Vectors Steel ETF (NYSE: SLX) Let's be honest: U.S. steel companies are no fans of China flooding the market with cheap exports. Manganese is a key ingredient in the production of steel and maybe China's willingness to withhold exports of that material means the country wants to keep more of its steel at home for domestic stimulation through infrastructure projects. That's a big "maybe," but more competitive steel pricing is good news for SLX. Up 16% year-to-date, the ETF is another 2011 stinker turned early 2012 winner.

Global X Aluminum ETF (NYSE: ALUM) Ingredients in the aluminum production process were among those mentioned in the WTO's chastising of China. The theory and the stretch here is similar to what we just discussed with SLX: If China wants to keep aluminum off the global market, prices could easily rise, benefiting ALUM in the process. Then again, the ETF may not need much help. It's up 17% to start the new year. At the very least if the WTO ruling can create a more level playing field, ALUM and SLX could be winners under that scenario.

Materials Select Sector SPDR (NYSE: XLB) A fine ETF for either confirming or disavowing the risk on trade, the Materials Select Sector SPDR devotes over 16% of its weight to Dow component DuPont (NYSE: DD) and rival Dow Chemical (NYSE: DOW). We bring that up because Chinese chemicals exports were also mentioned by the WTO. Overall, XLB is littered with U.S. companies that do battle with Chinese exports.

WisdomTree India Earnings ETF (NYSE: EPI) Don't forget that India was part of the WTO complaint against China and don't forget that EPI devotes over 12% of its weight to the materials sector. Many Indian materials firms are exporters of Chinese raw materials and with Chinese materials makers previously inflating prices for export while keeping prices low for domestic consumption, Indian firms were arguably hurt by that equation.

Other potential emerging markets ETFs that could benefit from the WTO ruling include the following: iShares MSCI Brazil Index Fund (NYSE: EWZ), iShares MSCI Chile Investable Market Index Fund (NYSE: ECH), iShares MSCI Mexico Investable Market Index Fund (NYSE: EWW) and the Global X FTSE Argentina 20 ETF (NYSE: ARGT).

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