Thread: Commodities, Strong Dollar Drive Emerging Market Profits

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    Default Commodities, Strong Dollar Drive Emerging Market Profits

    Emerging markets are in a bull market.

    That’s not something we’ve been able to say for much of the past several years. In fact, it was quite the opposite story last year, when emerging market stocks had collapsed on a combination of a lower U.S. dollar, plunging commodity prices and fears of a China-led global growth stall.

    Well, since mid-January, emerging markets have staged a laudable rebound. That rebound has been particularly robust over the past three months, as emerging markets exchange-traded fund (ETF) EEM has soared nearly 20% over that period.
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    The chart below of EEM shows the raging bull surge in the segment, which has vaulted the fund’s shares well past the 200-day moving average to levels not seen since November.

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    One driver of this emerging market bull is the rise of the U.S. dollar vs. rival foreign currencies. Perhaps more important is the rebound in commodity prices, which have really helped many emerging market countries, as many are commodity-producing nations.

    Then we have the rebound in China, which still is the biggest consumer of commodities. The shoring up of that country’s equity market and the still-slowing, but stabilizing economic picture there has given many investors the green light to get back into emerging markets.

    The charts here of the iShares China Large-Cap ETF (FXI), as well as the PowerShares DB Commodities Index Tracking Fund (DBC) tell the same tale of recent bullishness.

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    Under the rules of medieval heraldry, gold and silver were classed together as “metallic” colors, but could not be used on top of one another in a coat of arms. That relationship between the two is similar in the world of finance today, where gold and silver are both classified as “precious metals,” but are really two different metals with two different tendencies.

    This week’s exchange-traded fund (ETF) spotlight on the iShares Silver Trust (SLV) will be a deviation from the various gold funds I’ve been featuring but it still will be within my current theme of examining promising precious metals ETFs.

    SLV was founded in 2006 and it is not your standard ETF. The trust is not an investment company registered under the Investment Company Act of 1940 nor is it a commodity pool under the Commodity Exchange Act. Shares of the trust are subject to the same requirements as a mutual fund. SLV’s purpose is, generally speaking, to reflect the price of silver owned by the trust at that time and give investors exposure to the day-to-day movement of the price of silver bullion.
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    One rather unique feature of SLV is that the Trust’s shares are not redeemable except in large aggregate units called “baskets.” These baskets are created when silver is deposited into the trust, and SLV then will sell silver to cover the redemption price of these baskets. Only authorized brokers who have entered into a contract with the sponsor and trustee of the trust can purchase or redeem baskets, but shares of SLV can be bought or sold through any brokerage account.

    SLV’s share price has traded in a wide arc over the last year, with its high and low points approximately matching the strong and weak times in the market. Year to date, SLV has risen close to 20% on the recent surge that has taken hold of precious metals and related sectors. The trust does not offer a dividend, but it has a modest expense ratio of 0.5% and about $5 billion in assets. SLV is one of the largest precious metals ETFs out there.

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