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Resources ETFs May Be Back From the Dead

NEW YORK (ETF Expert) -- If one focused his/her attention solely on year-to-date performance, he/she might eschew foreign stock ETFs altogether.

With the S&P 500 SPDR Trust (SPY) and the iShares S&P Mid-Cap 400 (IJH) garnering 18% and 22%, respectively, who needs to dabble in emerging markets? After all, Vanguard Emerging Markets (VWO) registered a dismal nine-month showing of -8%.

Think about the discrepancy for a moment. Stock assets around the globe have a tendency to move in the same direction. Yet, broad-based emerging market ETFs have been a drag on investment portfolios. And there's more. During the October 2002 to October 2007 bull market period, emerging market equities provided three times the upside of their U.S. counterparts. In complete contrast, over the last two years, U.S. stocks have provided three times the upside.

On the other hand, if one looks beyond recent disappointments, as well as record ETF outflows in August, the reemergence of emerging markets may soon become the hot story. Not only did broad gauges like VWO appear to bottom out in late August, but resources-related ETFs skyrocketed on a three-month basis.

Are Resources-Based ETFs Back From The Grave?
3 Mon % 1 Year %
Guggenheim BRIC (EEB) 20.2% 3.9%
Market Vectors Steel (SLX) 19.5% 5.8%
First Trust Natural Gas (FCG) 17.8% 10.4%
iShares MSCI Brazil (EWZ) 16.3% -6.9%
iShares MSCI Australia (EWA) 14.5% 13.3%
Market Vectors Russia (RSX) 13.7% 2.0%
Guggenheim Global Timber (CUT) 13.6% 35.5%
iShares S&P Global Materials (MXI) 12.9% 3.6%
iShares MSCI South Africa (EZA) 12.6% -1.3%
Market Vectors Coal (KOL) 10.9% -16.8%
iShares S&P 100 (OEF) 4.2% 15.8%

Sentiment regarding emerging markets as well as resources-based assets has been improving for several reasons. For one thing, both China and Europe may be turning a corner. Economic data from both regions have improved and economic downturns are either stabilizing and/or demonstrating legitimate signs of expansion. This gives many of the exporters of basic materials and natural resources, companies as well as countries, a reason to be optimistic. Secondly, the Federal Reserve is likely to be more deliberate and perhaps more slow about tapering its bond purchases.

This may give emergers a bit of wiggle room with respect to a global environment that is more stimulus-friendly. Finally, fund flows in September did not merely go into broad market U.S. assets; developed Europe-Asia, undeveloped emergers as well as resource-heavy investments began to see significant ETF inflows as well.

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