ETF Plays Ahead Of G-20 Summit

by on September 23, 2009 | ETFs Mentioned:

On Thursday and Friday, the leaders of 19 of the most powerful nations, as well as the leader of the European Union, will meet in the Steel City to discuss a variety of topics ranging from economic integration to energy policy. Pittsburgh was chosen to highlight the dramatic shift in fortunes following the city’s struggles in the 70s and 80s and its transition to a more diversified economy. Pittsburgh has escaped the fate of the rest of the “Rust Belt” and even had an unemployment rate less than the national average during the earlier part of the year. Many people, including members of the White House, feel that Pittsburgh can attribute this recovery in part to its focus on technology and green jobs, focal points of the Obama administration. Many of the events at the conference will be held at environmentally-friendly sites, such as a LEED certified convention center and a conservatory. These backdrops should give the President a forum to address climate change and energy policies, as well as concerns about uneven world growth.

Downtown PittsburghIn addition to these issues, look for finance reform to be a point of discussion (and disagreement), as well as overtures from emerging countries that are looking to gain clout on the world stage. For these reasons (and many more), this summit looks to be one of the most important in recent memory; investors around the world will focus in on Pittsburgh to see if the great powers of the world will unite on key issues or emerge from the summit divided.

Green in the Steel City

Playing off all the green venues, issues of climate change and renewable energy initiatives should be in focus at the summit. Some ETFs that could be impacted by new regulations and pacts discussed at the summit include the Claymore/MAC Global Solar Energy ETF (TAN), the PowerShares WilderHill Clean Energy Portfolio (PBW) and Global Clean Energy Portfolio (PBD), and the Market Vectors Global Alternative Energy ETF (GEX) (to see a full list of energy ETFs click here).

One of the changes being discussed by an Obama administration official in a leaked letter is a proposal that “governments end all fossil fuel subsidies that are not essential and [use] that money to provide technical assistance to non-G-20 countries taking steps to reduce similar subsidies.” The EU is simultaneously proposing that the G-20 give over 100 billion euros (roughly $147 billion) a year by 2020 to help poor countries fight climate change. With a push for green energy throughout the world coming from both sides of the Atlantic, look for trading in the aforementioned “green energy ETFs” to be heavy as investors digest developments out of Pittsburgh.

TAN solely invests in wind power companies while PBW invests in a diversified portfolio of companies that either invest directly in clean energy or develop products that decrease energy usage. GEX and PBD take a different approach, investing in global alternative energy firms including wind, solar, and hydroelectric power firms. Should any significant regulation gain traction, these ETFs could see a jump.

Financial Reforms?

The EU is said to be coming into Pennsylvania with a united front for new regulation of bank bonuses. Some of the proposed changes would reduce compensations for bankers if their bank performs badly, with “the major part” of bonuses being deferred over time and possible canceled in the light of poor outcomes. This united front could push the issue to the forefront of the meetings, as the current EU president has even said “the bonus bubble bursts tonight,” language suggesting that the Europeans are very serious about these reforms and change to the status quo.

Look for banking ETFs such as KBE, IPF, and PJB to be in focus as these initiatives are discussed. KBE focuses on larger and international banks and is highly concentrated in a few holdings (more than 60% of the fund is in its top 10 holdings). PJB, on the other hand, invests in more regional banks and has less than 45% of its assets in its top 10 holdings.  IPF consists of international banks with more than 10% of the fund in each of Japan, the United Kingdom, Canada, and Australia. This ETF also has significant holdings in other European countries and could see some big movements on the heels of developments in Pittsburgh.

IPF

Rise of the Emerging Markets

Two officials from G-20 nations have said that there is an agreement in place to shift IMF quotas to underrepresented countries demanding more clout on the international finance stage. While an IMF system overhaul is probably long overdue (especially considering that China’s share of the votes is only slightly higher than that of Saudi Arabia), look for the real action to be any rhetoric related to the future of the U.S. dollar. Many emerging markets are tired of American economic policy and are fearful of their massive dollar holdings continuing to lose value (see our recent article on short dollar ETFs here). Eswar Prasad, a professor at Cornell University, was recently quoted on the Dow Jones Newswires saying that “what the Chinese and the rest of the world would like to see is a plan for the U.S. to bring its deficit down over the medium-term.” Prasad went on to note that “at the G-20, the rest of the world is going to be pushing very hard for the U.S. to articulate a plan for bringing down the deficit once the recovery is firmly in place.”

If Prasad is right, look for the U.S. dollar to see some movement, as well as currencies that could possibly compete with the greenback for reserve currency status, such as the Japanese yen (FXY) and the Chinese yuan (CYB). Lastly, look for the prices of traditional stores of value such as gold and silver to be impacted should it seem as though leaders have lost even more confidence in the fiat currency system.

While the outcome of the weekend is uncertain at this point, we can expect an eventful few days in Pittsburgh. To stay up to date on ETF plays for current events and international happenings, sign up for our free newsletter and get all of your ETF news delivered right to your inbox.

Disclosure: No positions at time of writing.