2 Funds Built for Global Recovery

08/25/2011 7:30 am EST


Jack Colombo

Editor, Forbes/Lehmann Income Securities Investor

The numbers are in on the best ETFs in July, and it’s time to prepare for the latter part of the year and Asia’s reawakening, notes Jack Colombo of the Forbes/ISA Closed-End Fund & ETF Report.

July’s best performers were mainly in Asia and Canada, an unlikely pair. The best performer was the IQ South Korea Small Cap ETF (SKOR), up 13.18%. This Korea ETF was joined by the Korea Equity Fund CEF (KEF), which was up 9.04%.

The second-best performer was the Guggenheim China Technology ETF (CQQQ), which climbed 10.47%. This fund purports to be the Chinese equivalent of Nasdaq’s QQQ, and is one of three China funds to make the best performers list.

Two Canadian funds, the Global X S&P/TSX Venture 30 Canada ETF (TSXV) and the IQ Canada Small Cap ETF (CNDA) were up 10.47% and 9.83%, respectively.

The loser’s list is comprised of European and Middle Eastern funds. The Greek debt crisis has not been resolved, and is never likely to be fully resolved.

A bailout that changes the terms of the bonds is considered a default by rating agencies, even if government’s think it doesn’t. At best, the litigation caused by bondholders suing credit-default swap issuers could go on for years. The resulting uncertainty will put a damper on European economies.

The Japanese have their own troubles, but uncertainty is not one of them. They seem to appreciate the troubles ahead and are coping. Three of the better performers that did not make the Top Seven list were Japan-related ETFs that were up more than 8% for the month.

Since ETFs usually trade at their net asset value, it would be nice to find a closed-end fund that trades at a discount in the same market. After all, why pay full price when it could be bought at a discount?

The Japan Smaller Capitalization CEF (JOF) is currently trading just above $7.50, giving the fund a discount of more than 10% to its net asset value. The fund’s one-year average discount is about 7%.

The fund does not use leverage and pays a small dividend of about 1% annually in December. The fund’s biggest investments are in services at 13.7% of assets, followed by miscellaneous manufacturing and electronics, both at 10.5%.

The fund has 21 million shares outstanding, giving it a market cap of about $180 million. The fund will be issuing more shares in the near future that will increase its market cap and liquidity. The fund has outperformed the Nikkei Index for the past year.

We previously recommended the Market Vectors Rare Earth/Strategic Metals ETF (REMX) in February 2011, when it was trading at $23.37. Now it’s a better bargain.

The fund invests in foreign and domestic securities of companies related to the production, refining, and recycling of rare earth and strategic metals and minerals.

China was able to shut down global production by cutting prices so sharply as to drive others out of business. In 2009, China announced it would reduce its export quota in 2010 to 35,000 tons per year.

The quota for 2011 was again reduced, this time to 14,446 tons. This precipitated price increases and global shortages, and prompted producers to reopen mines. REMX currently trades around $20 and has an expense ratio of 0.57.

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