ETF Expert: Should You Be Buying What China Buys?

Historically speaking, U.S. Federal Reserve policy had a direct and sometimes predictable impact on investment direction. In the 20th century, lower overnight lending rates meant good things for stocks. And, if the Fed tightened its grip by raising target rates, you might cut back your equity exposure with great success.

As we arrived in the 21st century, however, the results of following the Feds lead has had mixed results. The Feds rapid rate increases leading up to the dot-com collapse did little to deter Nasdaq euphoria at least for several years. Then in March of 2000, the reality of the rate increases contributed to the quickness with which sentiment became bearish. (Only then did many exclaim, See, you cant fight the Fed and win.)

In 2004/2005/2006 the Fed raised rates consistently, albeit slowly.Yet stocks prospered throughout a rate raising environment. And even the dramatic rate cuts throughout 2008 did little to stop the 2nd worst bear in 100 years. In other words, you could easily have fought the Feds rate cutting activity by deciding against the stock market and won.

Now the Fed is buying U.S. treasuries.  Most seem to think it would be a better idea to sell them. And the Fed is also buying mortgage-backed securities. Most seem to think this is actually a good investment. (See Rethinking Mortgage-Debt ETFs. )

Following the Fed in the 21st century, then mixed results. Similarly, we might have been inclined to buy what the U.S. government wished to buy through its TARP program. Former Secretary Paulson infused capital into banks via preferred shares acquisitions. Even uber-bank-bear Meredith Whitney agreed that preferred shares were a good buy for investors. Yet nearly all preferred shares of the majors are trading at lower prices today than they were trading at when TARP 1.0 went into effect.

In the end, one comes to the conclusion that theres no sure-fire thing. Just because your governments doing it, does that mean you should jump on the same bandwagon? Sometimes yes, sometimes no.

It follows that another major economic force in the world has been making scores of investment decisions. One has to wonder, might we choose to buy the things that China is buying?

For instance, state-owned Chinese companies have been on a materials buying binge. China MinMetals Corporation purchased $500 million of Australias Fortescue, and pumped another $1.2 billion into Australias Oz Minerals. And lest we forget, Rio Tinto accepted a nearly $20 billion cash infusion from Aluminum Corporation of China (i.e. Chinalco ).

If China is directly or indirectly gobbling up materials companies during bad economic times, might you want to follow the leader? If so, one of the best ETFs for global materials is the iShares S&P Global Materials Fund (MXI). It is handily outpacing the S&P 500 YTD as well as the MSCI EAFE International Index Fund (EFA).

China has also been investing heavily in electric-powered cars. In fact, as if Detroits prospects werent grim enough, China wants to be the world leader in hybrid and electric-vehicle technology.

Of course, the remarkable irony of alt energy investing is that it is strongly tied to the price of oil. When oil prices collapsed, so did the demand for alt energy ETFs. In fact, some of the alt energy ETFs fell more than the price of any other type of stock-based fund.

That said, plug-n-play cars will be coming to market, and their popularity may be enhanced by the eventual rise in oil prices, green consumerism and government subsidies. China is heavily subsidizing hybrid and electric vehicle purchases.

Simply put, the smartest way to benefit from Chinas alt energy endeavors may be through the diversified Global Alternative Energy ETF (GEX). Its not been a winner of late. Then again, some investors like to think beyond the present day by favoring longer-term eventualities.

One last thought. If electric cars do become competitors to the gas guzzlers we currently drive a lot of people wonder whether lithium batteries or lead-acid batteries or nickel batteries will benefit. Thats a speculative bet beyond my scope.

Nevertheless, there is the iPath Dow Jones-AIG Nickel Commodity ETN (JJN) for the more adventurous. Keep in mind, if nothing else, a country industrializing at the pace and ferocity that China is, needs a whole lot of nickel to manufacture everything from stainless steel to tubing to protective coating.

If youd like to learn more about ETF investing then tune into In the Money With Gary Gordon. You can listen to the show live or via podcast or on your iPod at this link .

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 Advisor 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.

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