Why Brazil ETFs and Australia ETFs Will Forecast The Return of Global Growth


On the surface, the last Monday in June has been no different than the other trading days in the first half of 2010. Investors have been dumping energy and materials ETFs; what’s more, they’ve been getting rid of country ETFs that depend heavily on the energy or materials sectors.
Sector ETFs In The First Half Of 2010 (Through 6/28)
  6 Month Approx %
Industrials Select Sector SPDR (XLI)2.4%
Consumer Discretion Select SPDR (XLY)2.0%
Financials Select Sector SPDR (XLF)-0.1%
Consumer Staples Select SPDR (XLP)-1.3%
Technology Select Sector SPDR (XLK)-6.3%
Utilities Select Sector SPDR (XLU)-6.6%
Health Care Select Sector SPDR (XLV)-7.3%
Materials Select Sector SPDR (XLB)-9.9%
Energy Select Sector SPDR (XLE)-12.2%
S&P 500-3.8%

Country ETFs Heavily Dependent On Materials Or Energy (Through 6/28)
 6 Month Approx %
iShares MSCI Chile (ECH)7.1%
iShares MSCI South Africa (EZA)-0.4%
iShares MSCI Canada (EWC)-0.6%
Market Vectors Russia (RSX)-4.8%
iShares MSCI Brazil (EWZ)-10.2%
iShares MSCI Australia (EWA)-10.8%

However, the reason that investors began selling energy and materials ETFs early in the year differs from the reason that they’re selling today. In the beginning of the year, for example, China’s tightening policy caused many to worry that demand for metals, minerals and oil might wane. Yet China has since shown that it is guiding its economy to a picture-perfect landing.
Flash forward to the May-June market swoon, and there are fears that the U.S. economy is weakening, not strengthening. Tack European austerity measures on top, and you have a recipe for a reduction in global demand for copper, steel, aluminum, fertilizers, pesticides, and timber.
Even if China demand proves stronger-than-expected… even if U.S. data supports the notion of economic recovery rather than refuting it… the dollar’s strength against the euro is yet another headwind. Commodities that are priced in dollars have become less expensive, hindering the total revenue for the companies that mine/drill/explore/transport/sell those commodities.
At the June lows (6/7/10), I cautioned investors about these headwinds for Materials ETFs. Not only is it important to recognize sector rotation, but it’s critical to refrain from falling in love with a singular theme; that is, investors loved the notion that worldwide stimulus would foster a self-sustaining global economic expansion dominated by infrastructure projects and natural resource-intensive endeavors.
How will you know when the global industrial cycle is kicking it back up a notch? How will you know when to rotate back into materials? You’ll need to see relative strength emanating from country ETFs like iShares MSCI Australia (EWA) and iShares MSCI Brazil (EWZ). Both show disappointing downtrends at this point in time.
EWZ 200 day
EWA 200 Day

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Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company receives advertising compensation from Invesco PowerShares Capital Management, LLC and Geary Advisors, LLC. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit thePacific Park Financial, Inc. web site.