Myth-Busting With 4 Important ETFs (GLD, ECH, FXI, IHI)
Follow the world of exchange-traded products long enough, say for anything longer than a day or two, and you'll soon realize there aren't a lot of folks out there that are just kind of lukewarm about ETFs. Either they love them or hate them. And since passions run so high regarding ETFs, there's a lot of misinformation about the products out there.
To that end, myth busting with ETFs usually entails dispelling the notion that ETFs are responsible for one-off events like the 2010 "Flash Crash" or that products such as leveraged ETFs will spell the end of financial markets as we know them.
With those already covered topics in mind, we're taking a different approach to ETF myth-busting today by looking at particular investment themes that are often applied to specific ETFs. The aim is to show that these ETFs may not be as intimately correlated to a certain macro theme as investors have been lead to believe. Consider the following:
iShares MSCI Chile Investable Market Index Fund (NYSE: ECH) It is widely believed that copper prices move this ETF or that the ETF and copper share a rather intense correlation. Yes, it is true the Chilean economy is heavily dependent on copper exports and the country is the world's largest producer of the red metal.
All that said, ECH hasn't shown much of a correlation at all to the relevant ETN that tracks copper prices. We argue that's the case because ECH isn't all that heavy on materials stocks. Copper may help ECH from time to time, but the ETF has shown a penchant for outperforming the red metal.
Now for the disclaimers and then the myth busting. We're not looking to hurt anyone's feelings and this is NOT an attack. Just a cordial disagreement. It was recently said that IHI would be a good way to play the aging U.S. population on the basis that demand for medical devices will increase in the years ahead. That may prove to be true, but that thesis is inherently flawed for the simple reason that it's too obvious.
Thinking along those type of fundamental lines implies that the market hasn't yet priced that future demand into IHI and its constituents. Maybe it has, maybe it hasn't. Either way, that school of thought is akin to saying Kraft (NYSE: KFT) and General Mills (NYSE: GIS) should be the best stocks on the market on the basis that people always need to eat.
iShares FTSE China 25 Index Fund (NYSE: FXI) Our issue with the iShares FTSE China 25 Index Fund, by far the largest of all China-specific ETFs, is two-fold. First, there is the notion, though it has been dispelled by several folks, that FXI is a good way to play China's dynamic economy. Wrong. The ETF is a good way to play Chinese banks and mega-cap state-run enterprises.
Second, some view FXI as the best of the large cap BRIC ETFs. Wrong. Year-to-date, FXI has been handily outperformed by the WisdomTree India Earnings ETF (NYSE: EPI), the Market Vectors Russia ETF (NYSE: RSX) and the iShares MSCI Brazil Index Fund (NYSE: EWZ). Over the past five years, EWZ has crushed FXI as well.
SPDR Gold Shares (NYSE: GLD) This one may be the most widely known at this point. The busted myth pertaining to GLD is that gold is a safe-haven investment and insulated from Europe's sovereign debt calamity. It has been in the past and very well could be again in the future, but for now, GLD and the Vanguard MSCI Europe ETF (NYSE: VGK) have basically moved in lockstep with each other to start 2012. Translation: Gold is a risk asset right now, not safe-haven.
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