Have Resource-Rich Country ETFs Lost Their Appeal?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

Editor's note: The following article was originally published on Thursday, July 7.

NEW YORK ( ETF Expert) -- With a variety of benchmark ETFs hitting multiyear highs on July 7 -- Powershares Nasdaq 100 ( QQQ), iShares Russell 2000 ( IWM), iShares DJ Transports ( IYT) -- investors have placed the May-June swoon in their rear view.

What's more, economically sensitive sectors like tech and consumer discretionary are leading the charge. In fact, some analysts believe that the momentum in cyclicals is a clear sign that the U.S. economy will accelerate in the second half of the year.

There are other theories, however. Some believe that -- economic warts and all -- U.S. stocks may be the best house on the equity block.

For example, Jeremy Siegel, co-founder of WisdomTree and author of Stocks For The Long Run, contends that U.S. stocks are more attractive today than he's ever seen them. He bases his belief on the fact that, when interest rates are in a low to middle-interest rate range, the average historical price-to-earnings ratio is 19. With the S&P 500 trading near 14 (less than the 50-year average of 15), U.S. stock assets may be especially enticing.

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I'm not sure I "buy" the good professor's assessment. For one thing, slicing 50 years of data into rate environments of "low-medium" and "medium-high" may only consider 25 years for each category. That's a narrow window. Meanwhile, if we're talking about an average P/E of 19 in a span of just 25 years ("low-to-medium" interest rates), the deviation around the mean would be far greater than over a 100-year span. And that makes it even more difficult to be confident in the attractiveness of an entry point.

Nevertheless, there may be something to Spiegel's theory. A number of country ETFs sport P/E ratios that are similar to U.S stock ETFs. And, those countries have "medium-to-high" interest rates today. Following the professor's logic, the P/Es of these international ETFs are not low enough when compared with U.S. stock ETFs.

Whether it's about the P/Es, interest rates, both, or a variety of factors, foreign stock ETFs are lagging in 2011. Moreover, the ETFs with the least momentum tend to be rich in natural resources.

Following are some examples:
  • Market Vectors Russia (RSX) has an approximate one-month return of 3.1% and an approximate six-month return of 1.9%
  • iShares MSCI South Africa (EZA) has an approximate one-month return of 2.9% and an approximate six-month return of 0.2%
  • iShares MSCI Canada (EWC) has an approximate one-month return of 2.8% and an approximate six-month return of 4.1%
  • iShares MSCI Australia (EWA) has an approximate one-month return of 2.1% and an approximate six-month return of 7.1%
  • iShares MSCI Brazil (EWZ) has an approximate one-month return of 1.8% and an approximate six-month return of -3.8%.
  • By contrast, the S&P 500 SPDR Trust (SPY) has an approximate one-month return of 5.6% and an approximate six-month return of 7.1%.

If Siegel's theory has global implications, then the P/E ratios for iShares Brazil and Market Vectors Russia are not attractive enough when interest rates are taken into account. Whereas the U.S. has a three-month of just 0.13%, Brazil's three-month is at 12.2% and Russia's three-month is at 8.2%.

On the other hand, it's equally plausible that central bank policy direction is a larger factor than the interest rate categories. If China achieves its aim of reasonable inflation and moderate growth, it will end its rate hiking campaign before too long. Same goes for India. When these events transpire, expect resource-rich ETFs like Brazil and South Africa to be leaders in the emerging market pack once more.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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