It is hard to determine what moves a broad group of stock so much that an exchange traded fund (ETF) will move sharply, but one factor could be that the major holdings are concentrated. This can lead to volatility.
Emerging market and country-specific funds are particularly prone to that correlated effect. iShares MSCI Brazil Index (EWZ) is an example, as just in the last 24 hours there have been multiple things going on in Brazil:
- Goldman Sachs gave Brazilian bank stocks an “attractive” rating
- Yesterday’s inflation number was lower than expected
- Industrial output numbers for 2007 were released, and it was a better-than-expected 6%
- Soybean and corn production will rise more than previously forecasted in an attempt to meet demand.
Will Swarts for SmartMoney reports that while ETFs are great vehicles for short-term traders, that doesn’t necessarily make EWZ efficient for smaller-scale investors. Small investors shouldn’t sweat the day-to-day movement so much.
By watching the 200-day moving average and seeing how an ETF is performing relative to that range, it’s easy to set up stop-loss orders and avoid any sort of sudden collapse, which is a worry for emerging markets investors.
You have to take a longer view with an ETF as an individual investor. You’re basically buying an index and that’s a very easy way to get some diversification.
Brazil is hitting all the sweet spots right now, but that’s not going to happen all the time. Emerging markets have had a great run and the growth in these regions will continue.
Latin America, overall, has been showing nice performance since Jan. 22:
Latin America Discovery Fund (LDF), up 13.8%
iShares S&P Latin America 40 Index (ILF), up 12.1%
iShares MSCI Mexico Index (EWW), up 10.5%