Keep These Resource-Rich Country ETFs on Your Radar

With a variety of benchmark ETFs hitting multi-year highs on 7/7/11 – 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 2nd 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 P/E is 19. With the S&P 500 trading near 14 (below the 50-year average of 15), U.S. stock assets may be especially enticing.

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.

Under-performance From Resource-Rich Country ETFs
				Approx % 1 Month		Approx % 6 Months
Market Vectors Russia (RSX)				3.1%		1.9%
iShares MSCI South Africa (EZA)				2.9%		0.2%
iShares MSCI Canada (EWC)				2.8%		4.1%
iShares MSCI Australia (EWA)				2.1%		7.1%
iShares MSCI Brazil (EWZ)				1.8%		-3.8%
S&P 500 SPDR Trust (SPY)				5.6%		7.1%

 

If Siegel’s theory has global implications, then the P/E ratios for iShares Brazil (EWZ) and Market Vectors Russia (RSX) are not attractive enough when interest rates are taken into account. Whereas the U.S. has a 3-month of just 0.13%, Brazil’s 3-month is at 12.2% and Russia’s 3-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.