Three ETFs to Watch Following GM Bankruptcy

by on May 28, 2009 | ETFs Mentioned:

With the news that General Motors’ bondholders rejected a proposed debt-for-equity exchange breaking Wednesday afternoon, a bankruptcy filing from the leading U.S. automaker appears to be imminent. The market had been expecting this as a possible outcome for some time, so official news of a filing from GM likely won’t send shock waves through Wall Street. But bankruptcies are often drawn-out and complicated procedures, and when the filer is as large and widely-held as GM, the effects can be equally widespread. Here are three ETFs to watch over the coming months as the next chapter in this saga unfolds:

  • State Street‘s DIA: This ETF tracks the Dow Jones Industrial Average, which counts GM as the second-longest tenured of its 30 components (GM was added on August 31, 1925; General Electric was added on November 7, 1907). If a bankruptcy filing does indeed occur, the DJIA will be looking for a new member, with GM certain to be cast aside. In a research note, Nicholas Colas, chief market strategist for BNY ConvergEx Group, presented seven possible replacements: Goldman Sachs (GS), Wells Fargo (WFC), Cisco Systems (CSCO), Apple (AAPL), Google (GOOG), Oracle Corp. (ORCL), and Monsanto Co. (MON). Given the size of the ETF and indexed fund industries, adjustments to any major index now cause a surge in demand for any stocks added. It will be interesting to see which company is added (the decision, by the way, falls to Wall Street Journal managing editor Robert Thomson), and how efficiently DIA is able to adjust its holdings. As of May 26, DIA held almost 7 million shares of GM, which would have to be sold in relatively short order.
  • iShares’ MSCI Japan Index Fund (EWJ): Amongst the biggest winners in a GM bankruptcy would be the automaker’s chief rivals. For years, GM and Toyota have been battling for the global automotive market share crown. If the bankruptcy stigma that will undoubtedly sting GM proves to be severe, Toyota would likely benefit. But the Japanese automaker, which once appeared invincible, has had its own struggles during this global recession. Toyota is the top holding in this ETF, representing almost 6% of EWJ’s portfolio (nearly 7 million shares).
  • ETF Securities Platinum ETF: For those of you scratching your heads at this one, allow me to explain: ETF Securities offers one of the only (if not the only) ETFs that exclusively holds platinum. This precious metal, which is popular in engagement rings, is also used in industrial settings. Platinum is a primary component of catalytic converters for automobiles, with this product accounting for 55% of platinum’s total demand, according to this Hard Assets Investor article. The fate of GM’s suppliers in the wake of a potential filing has been neglected recently, but it will be a major story line in the coming months. Platinum isn’t exactly cheap, settling at over $1,100 per Troy ounce recently. It will be interesting to see what impact a potential supplier consolidation/reduction has on platinum prices. 

Let me be perfectly clear: I’m not convinced that any of these funds are poised for major runs either up or down. But it will be interesting to follow their movements in the coming months, assuming a GM bankruptcy filing happens sometime within the next couple of weeks.