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3 Commodity Country ETFs to Watch on U.S. Dollar Strength

Thanks to upbeat U.S. economic data and concerns related to a sooner-than-expected rate hike, the U.S. dollar has mounted an impressive rally against almost every major foreign currency. In fact, the greenback was trading slightly below its four-year high last week against a basket of currencies.

Divergence in monetary policies among the major developed countries is believed to be the primary reason for the dollar’s uptrend. While bets are on that the Federal Reserve will likely increase rates next year, the central banks in Europe and Japan are boosting monetary stimulus to protect their economies from deflationary pressures (read: 3 Excellent ETFs to Play the Dollar Surge).

While the strength in the dollar might be benefiting export oriented companies, a strong dollar is hurting the prices of commodities and in turn the economies of commodity-centric countries. These countries are suffering from weaker export prices, which is hurting private investment as well as business and consumer confidence.

Added to slumping commodity prices, the slowdown in the Chinese economy has adversely affected the country’s construction industry. This has also hurt commodity-centric countries as China is a major trading partner of many of these nations.

Below we have highlighted three commodity country ETFs that might face sluggish days ahead given a strengthening dollar and a weaker Chinese economy. A stronger greenback is expected to hurt their exports and in turn their economies.

iShares MSCI Australia ETF (EWA)

The Aussie economy is a major exporter of commodities from the agricultural sector, energy products as well as industrial commodities like coal and iron ore. However, the economy has been hit hard by falling commodity prices worldwide. Prices of most of the commodities that Australia exports have dropped by roughly 12% this year while prices of iron ore are at five-year lows.

This has affected the country’s exports which fell 0.9% during the second quarter and was the primary factor for Australia’s modest GDP growth during the June quarter (read: Australia ETF Investing 101).

EWA tracks the MSCI Australia Index which provides exposure to large and mid-sized Australian companies. The fund is heavily skewed towards its top 10 holdings which account for almost 60% of its total assets. Commonwealth Bank of Australia, BHP Billiton Ltd. and Westpac Banking Corporation Corp take the top three spots with roughly 30% allocation.

EWA pays out an impressive 3.6% yield which is largely possible due to its high allocation towards the Financial sector (50.3%). Nevertheless, a major portion of its portfolio is also allocated to the beaten down commodity based sectors such as Materials (17%), Industrials (5.7%) and Energy (3.8%).

EWA manages an asset base of $1.8 billion and has lost 10.9% in the past one month.

iShares MSCI Chile Capped ETF (ECH)

Copper has been the worst performing metal among the six main metals and has slumped more than 9% this year. Chile is the second largest producer of copper in the world and copper accounts for more than half of Chilean exports (read: 3 Industrial Metal ETFs to Buy Amid Weak Global Trends).

Declining copper prices and the slumping growth in China are adversely affecting exports. Chile expanded by 1.9% y-o-y during the second quarter – the slowest pace since 2009. Slumping mining investments are believed to be the main factor behind weaker growth.

The threat of deceleration is so real that the country’s President has recently announced a stimulus package to boost growth in the country. Moreover, Chile’s central bank has slashed its policy rates by 175 basis points since last October.

The fund manages an AUM of $320.6 million holding a basket of 39 Chilean equities. S.A.C.I. Falabella (10.5%), EnersisSa (9.1%) and EmpresasCopec (8%) are the top three holdings.

From a sector perspective, Utilities takes one-fourth of total fund allocation, followed by Financials, Materials and Consumer Discretionary with double-digit allocation each.

The fund has a dividend yield of 1.61% and charges 61 basis points as expenses. ECH has lost more than 1% in the past 1 month and is down 8.7% in the year-to-date frame.

iShares MSCI South Africa ETF (EZA)

South Africa is the world’s largest platinum and second-largest palladium producer, accounting for 80% and 33% of global supply, respectively. Though palladium prices have fared pretty well this year, platinum prices have fallen to the lowest level in roughly five years. Lackluster economic performance in Europe and Japan, which led to shrinking demand for the metal and a stronger dollar are the primary factors for platinum’s terrible performance.

EZA tracks the MSCI South Africa Index to provide exposure to large and mid-sized companies in South Africa. The fund holds a basket of 52 stocks which are quite heavily concentrated in its top three holdings. Naspers Limited occupies the top spot with 15% allocation, followed by MTN Group and Sosol Ltd with 12.3% and 10.2% allocation respectively (read: Behind the Recent Rise in the South Africa ETF).

The product manages an asset base of $470.9 million and trades in good volumes of more than 350,000 shares a day. EZA charges 61 basis points as fees and has slumped 8% in the past one month.

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