Once-Hot ETFs May Be Cooling

11/12/2008 12:01 am EST

Focus: GLOBAL

Tom Lydon

Editor and Publisher, ETF Trends

Tom Lydon, editor of ETF Trends, says some former high-flying ETFs are now lagging.

Gold has been defying the fundamentals, ignoring its usual correlation with down markets. The SPDR Gold Shares (NYSEArca: GLD) exchange traded fund (ETF) is down 16.2% in the last month, while the Standard & Poor’s 500 index is down 15.3%. Gold is generally seen as a safe haven, so investors run for cover with the metal in down markets. But a strengthening dollar has turned the tables on that thinking for the time being, as gold typically moves opposite the greenback.

Copper prices are falling on lower demand. The metal is often used for electrical wiring and pipe, but the global decline in homebuilding has put a dent in the need for it for the time being, according to MarketWatch. Copper sales at one company, Newmont Mining (NYSE: NEM), fell 84% in the third quarter.

Chile, the world’s largest copper producer, saw 10.3% less output in September from a year earlier. Reuters reported that it’s the third consecutive month year over year that production declined.

A platinum producer in South Africa has cut its annual output forecast for the third time. Lonmin Plc (NYSE: LMI) said the full-year platinum output from its concentrators has fallen 16% in the year ending September 30th. Bloomberg reported that the company had expected production to improve going into 2009. South African mines have been plagued all year by production interruptions, caused by a failure of the state-owned power company to meet demand.

After falling 46% this year, platinum prices have recently gained along with palladium, which had been down 51% for this year. Car makers account for 60% of global platinum use, and a struggling auto industry is leading lower demand for the metal.

Among funds that might be affected: PowerShares DB Base Metals (AMEX: DBB), down 33.7% year-to-date.

Moving to India, exchange traded funds could be feeling the impact of falling prices and a rash of political instability. According to Bloomberg, India’s inflation rate fell below 11% for the first time since May, giving the central bank room to reduce interest rates. The bigger-than-expected drop could spur the bank to focus on supporting economic growth instead of controlling inflation amid the threat of a global recession.

Wholesale prices rose 10.7% in the week ending October 18th from a year ago. It’s slightly slower than the 10.8% increase economists had expected. India’s central bank recently reduced its economic-growth forecast to as low as 7.5% from 8% in the year to March 31.

In the Indian state of Assam, more than 60 people were killed and 300 injured during a series of 12 bombings, because of fighting between indigenous groups and immigrants from nearby Bangladesh.

Long-standing wars over the land between members of the Bodo tribe and Muslim settlers from Bangladesh have also spread out to other regions. The political instability in a time of economic upheaval could be an impediment to future growth. The PowerShares India (NYSEArca: PIN) ETF is down 50% since its March 5 inception.

For both of these ETFs, the horse is already out of the barn, so selling now would be too late. Although markets may decline further before things get better. We'd buy when these funds go back above their 50-day moving average.

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