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3 Country ETFs to Benefit from Falling Commodity Prices

The glorious years of the commodity super-cycle, which started back in 2000, now seems like a distant past. After a decade long outperformance, most of the commodities have yielded to the forces of gravity. The benchmark Bloomberg commodity index has slumped in excess of 6% this year and is now trading at a five-year low.

Be it industrial or agricultural commodities, the majority of them have delivered negative returns this year, with products like coal, cotton, corn, iron ore and copper all trading at multi-year lows. Oil is currently trading below the $80 mark – the lowest level in five years – after trading above $100 since 2011. Most of the metals have also fallen quite a bit this year, extending the downturn across most types of natural resources.

Commodities which clocked smart gains for the first few months of the year due to a weaker dollar, adverse weather and greater demand have all given up their previous gains. Significant slowdown in the world’s largest commodity buyer of China, a supply glut, slowing growth in the global economy which led to sluggish global demand and a strong dollar played crucial roles in bringing down the prices.

However, lower commodity prices are expected to be a blessing for many emerging market countries – those that are importers of commodities. Lower commodity prices will make raw materials cheaper and hence are expected to reduce inflation. In fact, according to Credit Suisse, cheaper raw materials are expected to lower aggregate emerging market inflation, excluding China and India, by 1% to 6.6% by the end of 2015, per a Bloomberg article.

A lower inflation rate will lead the central banks in these countries to delay a rate hike or ease policies in the case of other struggling nations, thereby helping them to support growth (read:4 Emerging Market ETFs to Consider for Q4).

Below we have highlighted three country ETFs which are expected to benefit from falling commodity prices. Investors should keep these products on their radar should the funds benefit from slumping commodity prices.

South Korea

Oil forms more than 30% of South Korea’s total imports, and as such, lower oil prices will significantly reduce the country’s import bill. iShares MSCI South Korea Capped ETF (EWY) is the most popular ETF tracking the country with an AUM of $4.4 billion. The fund tracks the MSCI Korea 25/50 Index to provide exposure to a basket of 104 stocks (see all Asia-Pacific (Developed) ETFs here).

Samsung plays a dominant role in the fund’s performance as EWY has a huge 21.7% of its asset base invested in the company. Apart from Samsung, all the stocks have below 5% exposure in the fund, suggesting good diversification beyond the electronics giant. Hyundai Motor and SK Hynix occupy the next two spots.

Among sector allocation, Information Technology occupies the top spot with 35.9% exposure, though Consumer Discretionary, Financials and Industrials also get double-digit allocation in the fund. The fund charges 61 basis points as expenses and has a Zacks ETF Rank #2 or Buy rating (read: Korea ETFs in Focus on Stimulus Plan, Interest Rate Speculation).

Taiwan

Mineral products and basic metals form the majority of Taiwan’s imports and their lower commodity prices will benefit the country as well. iShares MSCI Taiwan ETF (EWT) tracking the MSCI Taiwan Index is the most popular product in the space. The fund invests about $3.2 billion of assets in 104 securities. However, with around one-fifth of the total exposure being in a single company, Taiwan Semiconductor, EWT has significant concentration risk.

Hon Hai takes up the second position in the portfolio with about 8% share, followed by Mediatek. Sector wise, EWT relies heavily on Information Technology (57.7%), followed by Financials (17.8%) and Materials (9.5%).

The fund charges an expense ratio of 61 basis points a year and is a highly liquid ETF trading at an average volume of 6.7 million shares a day. EWT carries a Zacks ETF Rank #3 or Hold rating.

Philippines

This often overlooked market could be an intriguing choice for investors seeking exposure to countries benefiting from falling commodity prices. Mineral fuels form roughly 20% of the country’s total imports and as such falling crude prices will lead to lower inflation levels and a pause in the rate hike cycle.

iShares MSCI Philippines Investable Market Index (EPHE) invests about $356.7 million in assets in 42 Philippines stocks. The Financials sector dominates the fund with about 37% exposure, followed by Industrials (22%) and Telecom (13.9%) (read: 3 Emerging Market ETFs to Buy On the Dip).

As far as individual stocks are concerned, Philippine Long Distance Telephone (11.5%), Ayala Land (9.7%) and BDO UnibankInc (6.4%) take the top three spots with a little over more than one-fourth of fund assets.
EPHE charges 61 basis points as fees and also has a Zacks ETF Rank #3.

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