How Investors CAN Play The BRIC Through A Different Set Of Country ETFs

by on November 18, 2010 | ETFs Mentioned:

In the post-financial crisis world, many have proposed that the global economy is finally starting to “decouple,” as evidenced by the impressive expansion in emerging markets as growth grinds to a halt in the developed world. As the economies of the U.S. and Western Europe have sputtered, soaring economies in some of the world’s fastest growing countries such as India, China, Brazil, and Indonesia have emerged as the true drivers of global economic expansion.

As these emerging superpowers continue to grow at an impressive clip, they have begun to demand larger quantities of raw materials in order to feed rapidly-growing populations that are quickly moving into the middle class. These new consumers now have the resources to buy a variety of discretionary products, improve diets, and demand efficient infrastructure in swelling urban areas. This shift in emerging markets demographics has strained commodity markets around the world, as China imports greater quantities of coal and iron to keep up steel production and facilitate construction while Indonesia brings in more grains as a way to fatten up livestock and keep up with rising meat consumption across the nation [see Inside Five Surging Commodity ETFs].

Demand from emerging markets has pushed many commodities–ranging from coffee and sugar to corn and wheat–to new plateaus in recent weeks and raised questions about potential supply shortages. While this hasn’t been great news for consumers, it has given a nice boost to commodity producing nations the world over. Although many of the world’s most commodity–intensive economies–such as Brazil, South Africa and Russia–are emerging markets, a few developed countries also make the list of nations that have benefited from a surge in commodity demand and prices. Chief among them are the three industrialized nations of Canada, Australia, and New Zealand.

These three markets all have increasingly significant exposure to dynamic Asian economies that are clamoring for more commodities to develop infrastructure, expand cities, and generally fuel economic growth. Canada is a chief supplier of energy commodities, while Australia is rich in minerals and New Zealand produces vast quantities of dairy products and wool–all items in high demand across developing Asia [also see How Emerging Market ETFs Offer A New Way To Invest In Commodities].

This demand for some of these countries’ key products has helped to keep these economies afloat despite broad weakness in other developed markets that have come to rely on the American consumer as primary drivers of growth. While some might discount the effect of rising levels of exports on the host economies, the proof is in the interest rate decisions by the countries’ respective central banks. Interestingly, all three of these nations have seen central banks boost benchmark interest rates in 2010 which stands in marked contrast to the major economies of Europe, the U.S., and Japan, all of which have either kept rates flat or introduced new easing measures in the past few months. In fact, Canada has raised its rates by 75 basis points so far this year while Australia and New Zealand have both boosted theirs by 50 basis points.

Below, we profile three country-specific ETFs that offer exposure to these uniquely-positioned developed markets that may thrive off of growth in emerging markets in coming years [use the ETF Country Exposure Tool].

iShares MSCI Canada Index Fund (EWC)

Through the first half of the year, Canada exported close to $10.8 billion to emerging markets, an increase of over $2.4 billion from the same period last year. Many of these exports end up in China, which is now the country’s third biggest export destination after traditional partners in the U.S. and the UK. According to Export Development Canada, Canadian exports to China have surged nearly 55% over the past five years. “There’s no doubt that Canadian companies are looking more beyond their traditional markets and much more beyond the United States,” said Jayson Myers, president of the Canadian Manufacturers and Exporters. “Canadian companies have learned their lesson from this recession — that there’s a lot of risk to doing business in the United States, and there’s just better business opportunities around the world.”

The largest economy on the list, Canada is accessible by EWC, which trades close to three million shares a day and has over $4 billion in assets. While financials take the top sector spot with close to 33% of total assets, energy and industrial materials are not far behind with 25% and 24%, respectively. Industrial material and energy firms making their way into the top ten of EWC’s list are Suncor Energy (4.5%), Barrick Gold (4%), Potash Corp of Saskatchewan (3.7%), Canadian Natural Resources (3.3%) and Goldcorp (2.8%). These companies provide a sampling of major Canadian exports: gold, oil, and potash [read Do You Need A Canada ETF?].

iShares MSCI Australia Index Fund (EWA)

Australian exports rose by an astounding 20% in the second quarter of this year, buoyed by high levels of demand for raw materials such as iron and coal, both critical components of steel production. In fact, the country is predicted to export close to $180 billion worth of energy and mineral commodities next year, a 29.9% increase from the current year projections which has helped Australia to keep unemployment levels much lower than comparable rich countries.  ”This is yet more evidence that the surge to national income from higher commodity prices continues to flow into the economy,” said JP Morgan’s Ben Jarman. ”That’s going to have very important consequences for earnings in the mining sector and also the budget balance.” Should this trend continue it could allow Australia to continue to grow at a solid clip and maintain solid fiscal footing. With surging iron and coal prices built into many contracts it appears that the nation just may be able to continue this growth streak even with the slight slowdown in October demand from the Chinese.

Although EWA is heavily concentrated in financials–banks make up close to 45% of the fund’s total assets–this ETF also offers investors a great deal of exposure to the mining sector, which makes up 28% of holdings. In fact, in the fund’s top ten holdings there are three natural resource firms, including Newcrest Mining, Rio Tinto, and BHP Billiton, which combine to make over one-fifth of the total assets. EWA pays out a robust dividend yield of 2.6% and charges a modest expense ratio of just 52 basis points [read Seven ETFs To Invest Like Peter Schiff].

iShares MSCI New Zealand Index Fund (ENZL)

One of the key exports of New Zealand is in the dairy sector, which has thrived as milk sales to China have grown at an impressive rate over the past few years. “Over the last eight years, the market has increased at an average annual growth rate or more than 15 percent and it still only consumes just over 10 percent of the United States’ per capita consumption. Imported dairy products only represent less than 10% of total demand,” said James McVitty, discussing the fact that dairy exports to China are nearing NZ$1 billion–impressive numbers for a country of under 4.5 million–and have plenty of room to grow in the near future. However, rising demand has not been limited to China, as exports to Singapore, Hong Kong, and Taiwan all grew by double digits in 2009, which more than helped to cancel out the slack demand from developed markets; New Zealand recorded an 8.6% drop from the country’s traditional export destinations of Australia, the U.S., and Japan.

One way to gain exposure to the New Zealand equity market is with the relatively new ENZL. This ETF tracks the MSCI New Zealand Investable Market Index, a free-float adjusted market capitalization weighted benchmark designed to measure the performance of equity securities in the top 99% by market capitalization of equity securities listed on stock exchanges in New Zealand. The fund has allocations to 25 securities in total, with the largest sector allocation going to industrial materials, which comprises just over one-fourth of the total assets. This includes a 19.9% holding in Fletcher Building which is not only the largest company in the country by market capitalization, but a leading provider of steel, laminates, and other infrastructure related goods such as cement.  In terms of market capitalization levels, the fund focuses in on medium and small cap securities and offers no allocation to large or giant caps [see iShares Debuts New Zealand ETF].

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Disclosure: Eric is long both EWA and ENZL.