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Should Investors Consider Commodity Country ETFs?

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As commodity prices start to rebound thanks to an improved economic outlook, a number of countries around the globe are seeing their fortunes rise along with these key products. Increased economic activity is reigniting demand for everything from copper to oil while higher living standards in much of the developing world are having a similar impact on many agricultural commodities. Overall, many are starting to believe that the slump in commodity prices that investors saw for much of last year is finally subsiding once again.

Thanks to this possible trend, some investors could be better served by looking at commodity dependent nations, which could now be on the upswing due to higher prices for their key exports. After all, this surge in prices can often put more money back into local economies, boosting growth and providing a key source of fresh currency. Additionally, the rise in prices can often support more job growth as well, boosting wages and increasing broad consumer spending in the process. 

Dutch Disease

Yet, while this situation can often be positive for economies, there is a key risk that needs to be taken into account as well. This issue, which is known as ‘Dutch Disease’, results from a great deal of commodity exports and the impact this can have on other industries in a country (read Three Commodity ETFs That Have Not Surged).

In this scenario, a country exports so much that it drives up the value of their home currency, making manufactured goods expensive compared to other world powers. When this happens, it can drag down manufactured export growth and lead to economic stagnation, trapping some economies in a rough patch that is tough to break out from.

However, many nations are now better prepared for this issue and have a multitude of tools at their disposal in order to minimize the impact of this problem. In addition to capital controls and sovereign wealth funds, nations can also encourage savings, and as a last resort, boost tariffs or subsidies to manufacturing industries. Unfortunately, this can be a risky approach, especially if raw material prices fall back to earth in short order (Read Is USCI The Best Commodity ETF?).

Despite the risks, many of the countries that are big commodity exporters are well positioned at this time. The vast majorities are extremely stable from a political perspective—Australia, Chile, Canada, and New Zealand come to mind from this list—while most have low debt levels as well.

Lastly, trade balances are usually in commodity producing nations’ favor, suggesting that the country may be in a relatively good financial position (although not all commodity dependent nations have a current account surplus).

For investors seeking to make a broad play on these commodity focused countries, without honing in on commodity producers or futures contracts themselves, there are a few ETF options available. These choices can allow investors to focus on commodity centric nations across all sectors of their economies, playing on the trend that strong commodity exports are good for the entire country. So if investors believe in this idea, either of the following two ETFs could be an intriguing pick:

Guggenheim ABC High Dividend ETF (ABCS)

If investors are looking for a focused play on three commodity dependent countries, Guggenheim’s ABCS could be an interesting choice. The fund tracks the BNY Mellon ABC Index which focuses on securities from Australia, Brazil, and Canada (read Australia ETFs: A Developed Market Play On Asian Growth).

In order to pick securities, the fund looks to take the ten stocks or ADRS with the highest yield from each of the three component nations. Currently, Brazilian firms make up a plurality of assets in the ETF at just under 44.4% while Australian (31.5%), and Canadian (24.1%) firms round out the rest of the basket.

In terms of sector exposure, utilities take the top spot and are closely trailed by energy and basic materials. Consumer cyclical and financials also comprise roughly 14% of the fund each giving the product a nice mix of sectors. With that being said, investors should note that the fund is almost entirely in firms defined as ‘blend’ companies and that none of the product is in growth stocks (read Three Low Beta Sector ETFs).

This probably shouldn’t be too surprising given the focus on high yield stocks, but it is important to note nonetheless. Lastly, ABCS charges investors roughly .65% a year in fees and sees a rather large bid ask spread thanks to low AUM and volume. However, the fund does look to pay out roughly 4.9% a year to investors, assuming the first two dividend payments are representative of the product’s future yield.

WisdomTree Commodity Country Equity Fund (CCXE)

For a more diversified play on the space, investors have WisdomTree’s CCXE. The fund follows the WisdomTree Commodity Country Equity Index which gives exposure to a smattering of commodity-focused nations from around the world.

At time of writing, developed markets took up four of the top five spots including double digit allocations to Australia, Norway, Canada, and New Zealand, while Russia (the third biggest holding) was the only emerging market to make the top five nations.

The ETF currently holds 150 stocks in its basket, giving high weightings to the financials, energy, and telecom industries. Basic materials make up the fourth spot, so the product does look to have a decent concentration in commodity sectors from an overall perspective as well (read Three ETFs With Incredible Diversification).

The fund charges investors 58 basis points a year in fees and sees relatively wide bid ask spreads, a factor that could increase overall trading costs. Nevertheless, the fund does pay out a solid yield of just under 3%, suggesting it could be a decent destination for current income as well.

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