Before the global commodity bust of 2008, emerging Asia ETFs and emerging Latin America ETFs had posted exceptional returns for 6 years. Yet, investors were clamoring for even more exotic landscapes on bold new frontiers.
South Africa? some would scoff. The monster opportunities exist in northern Africa, in places like Morocco and Egypt.
Israel? others retorted with apparent frustration. Real Middle Eastern growth taps Kuwait and Bahrain.
Then the wheels came off the world’s financial engine. Moreover, the idea that frontier markets could decouple from the U.S. was premature.
In fact, frontier markets are still too dependent on selling their goods to the developed world. Whereas China and Brazil can sell to one another, bolstering the respective middle classes, many in the Middle East and in Africa require developed world purchasing of their exports.
It follows that the Vanguard Emerging Market Fund (VWO) has handily outpaced PowerShares MENA (PMNA), Claymore Frontier Markets (FRN) and Market Vectors Gulf States (MES).
Market Vectors Africa Index Fund (AFK), on the other hand, has experienced a decent renaissance due to untapped resources and materials. Yet one has to be wary of how much weight he/she gives to resources and basic materials in a portfolio. Investing in Brazil (EWZ), South Africa (EZA) and Market Vectors Africa (AFK) may be geographically diverse, but such a portfolio remains very dependent on the demand for various commodities.
Noting the risks, here are 3 commodity ETFs with near-term potential for price appreciation:
1. Natural Gas. Bespoke recently reported that United States Natural Gas (UNG) has seen a 77% increase in trading activity over the last 50 trading days. Marc Courtenay identified that the price of oil is trading at 19x that of natural gas at $3.7 a British Thermal Unit whereas history pegs the ratio at 10x. In other words, oil could pull back to $60 per barrel, and natural gas would need to jump 60% to reach the historical average.
I spoke about natural gas in a recent column, Shouldn't the Natural Gas Commodity ETF Catch Up To The Natural Gas Company ETF? In essence, the explorers/producers of natural gas in the First Trust Rever Nat Gas Fund (FCG) had amassed nearly 25% YTD, whereas the commodity being tracked by United States Natural Gas Fund (UNG) had lost -37%. This disparity adds more fuel to the nat gas fire.
However, it's been extremely volatile for traders and longer-term believers alike. In the last 10 days alone, United States Natural Gas (UNG) has traded in a range between 13.56 and 16.07... more than 15%.
2. Platinum. Like the vast majority of commodities that went bust in the 2008 sell-off, platinum swan-dived -65% from its record heights. Not only had the demand for stuff imploded, but the demand for platinum had an additional hurdle that is, with more than half of its world demand coming from the auto industry, the downtrend was exacerbated.
Nevertheless, the global industrial cycle has picked up dramatically, pushing E-TRACS UBS Long Platinum ETN (PTM) up 70% off its 52-week lows. While it would require a 70% gain from here to recapture its glory days, many would simply be satisfied to see steady appreciation in a quasi-precious metal/base metal investment.
E-TRACS UBS Long Platinum ETN (PTM) is, by all accounts, in a technical uptrend above its 200-day moving average.
3. Agriculture. PowerShares DB Agriculture (DBA), while providing consistent 2009 gains, has underperformed metal mania. For the most part, this is due to extreme attention being paid to re-emerging market infrastructure growth.
What's not accounted for, however, is re-emerging global food demand due to increasing standards of living as well as population growth. Moreover, U.S. consumption of food is roughly 15% of the Consumer Price Index (CPI). The percentages in China and India are 33% and 46% respectively.
DBA is comprised of futures contracts on some of the most widely traded agricultural commodities including corn, wheat, soybeans and sugar. Considering alternative energy needs for biofuels, the ever-present possibility for adverse weather conditions and corn usage currently exceeding production, one might look to further gains in agriculture.
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Disclosure Statement: ETF Expert is a web log (blog) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.