Five Unlikely ETF Winners From Yuan Policy Shift

by on June 21, 2010 | ETFs Mentioned:

The timing of perhaps the most significant policy shift in China’s recent history was interesting for a number of reasons. Beijing’s announcement that the Chinese currency would be afforded increased flexibility came in the middle of the weekend, just days ahead of a G-20 summit in Toronto at which China’s currency policy was expected to be a central issue. And the news came after speculators had all but given up on a yuan appreciation. At the beginning of the year, currency derivatives markets markets had been pricing in about a 3% increase in the value of the yuan relative to the dollar over the next 12 months; recently the expectations had declined to about 1%, reflecting perceived stubbornness from Beijing on its currency policy.

The Saturday night announcement was likely designed to blunt the backlash of export-dependent industries that have thrived on a cheap currency. It also set the stage for a frantic beginning to the trading week around the globe, with most equity markets surging at the opening bell on Monday is response to the long-awaited shift. Many of the beneficiaries from China’s new-found exchange rate flexibility are obvious. With the Chinese yuan appreciating relative to the U.S. dollar, funds offering exposure to the currency jumped in early trading (see a list of all Chinese yuan ETFs). Chinese equity markets also got a big boost to start the week, as economists predict that a more rapid transition away from dependence on international consumers will benefit equities in the long run. And of course foreign manufacturers that compete with Chinese imports–particularly in the U.S.–were celebrating the news.

Other winners from the weekend’s big development were less obvious. Below, we profile five unlikely ETF winners from China’s surprise shift (for more ETF insights, sign up for our free ETF newsletter):

Energy Select Sector SPDR (XLE)

After the fallout from the devastating spill in the Gulf of Mexico further battered its public image, the energy sector was in need of some good news. And it arrived over the weekend, in the unlikely form of a more valuable yuan. Crude oil prices jumped on the news of China’s new currency policy, reflecting expectations for increased demand from one of the world’s biggest consumers of natural resources. An increase in the yuan’s value makes resources priced in U.S. dollars, such as oil, more affordable to Chinese businesses, and should be expected to increase the already voracious appetite for raw materials. Oil prices had climbed to nearly $80 on Monday, helping to send XLE up by 1.5%.

WisdomTree Dreyfus New Zealand Dollar Fund (BNZ)

The surge in yuan ETFs was to be expected on Monday, but the impact of China’s decision on other exchange rates was less certain. It seems that the biggest beneficiaries are those most closely tied to Chinese growth, including the Australian and New Zealand dollars. BNZ, which seeks to deliver total returns reflective of both money market rates in New Zealand available to foreign investors and changes in value of the New Zealand Dollar relative to the U.S. dollar, climbed about 1.4% in late morning trading on MOnday.

Global X Copper Miners ETF (COPX)

With prices of dollar-denominated commodities surging on the back of Beijing’s announcement, the profitability of companies engaged in the production of such resources is expected to jump as well. Just as XLE received a boost from a jump in crude oil prices, COPX benefited on Monday from a reversal of downward trends in copper prices. This ETF tracks the Solactive Global Copper Miners Index, a benchmark designed to reflect the performance of the copper mining industry. COPX had surged  more than 5% in morning trading on Monday, making it one of the top performers on the day.

Emerging Markets Metals & Mining Titans Index Fund (EMT)

Similar to COPX, this ETF offers exposure to companies engaged in the extraction and production of raw materials, and stands to benefit from an increase in Chinese demand. EMT is more diversified from a resources perspective, offering exposure to copper along with a number of other industrial and precious metals. This ETF focuses on companies operating in emerging markets, putting it in a unique perspective to benefit from a more flexible yuan.

iShares MSCI Germany Index Fund (EWG)

An increase in the value of the yuan makes Chinese exports more expensive to international consumers, eroding part of the advantage many international officials believed China had gained by keeping the value of its currency artificially low. So predictably, the big winners from a rising yuan include exporting countries that compete with China, including Japan, Korea, and Taiwan. A perhaps less obvious beneficiary is Germany, the world’s second-largest exporter (behind China). EWG, which tracks the MSCI Germany Index, climbed about 1% on Monday morning.

Disclosure: No positions at time of writing.