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3 Country ETFs to Buy on Cheaper Oil Prices

Zacks Equity Research

Last year following a strong winter, oil prices were under tremendous pressure. Yet, prices for the important commodity have been continuously retreating in the past few months, and now WTI crude is barely hanging on to the $75/barrel mark, after hitting the triple-digit level in the first half of this year. Brent oil too is now hovering around the $78 a barrel mark.

Oil prices were on a tear in the first half of the year bolstered by an acute winter in the Northern Hemisphere, and geopolitical tensions from Russia to Iraq threatening supplies.  However, sluggish demand thanks to a soft macroeconomic backdrop in some developed regions including the Euro zone and China, booming oil production resulting in abundant supply, price-war in OPEC nations and a strengthening dollar changed the entire picture. 

If this was not enough, technical recession in the Japanese economy, which shrank 1.6% in Q3 and 7.3% in Q2, pushed down oil prices even lower. Notably, Japan happens to be the one of largest crude importers in the world. Thus, a blow to oil prices is self-explanatory.
So far this year, Brent crude has plunged about 30% while WTI crude has fallen around 19%. While the oil rout posed a threat to a number of asset classes, there are a handful of country ETFs – highlighted below – that could emerge as winners if oil continues to drop, or at least remains subdued.

iShares India 50 ETF (INDY)

Per U.S. Energy Information Administration, India was the fourth-biggest user of crude oil and petroleum products in the globe in 2013. Notably, India imports more than 75% of its oil requirements, thus being highly susceptible to oil prices.

In June, Financial Times indicated that Barclays projects a $10 per barrel rise in crude oil price would cost India a 0.5 percentage points in its growth rate. This scenario should be opposite when oil prices decline (read: India ETFs: Best of the BRICs Now?).

If crude prices continue to see a downtrend, India will not have to shell out all its so-far-saved foreign exchanges to pay the higher import bills. This in turn will lessen India’s currency concerns as well as widening current account deficit especially given the strength of the greenback. India’s oil imports fell 19% to $12 billion in October thanks to a slide in oil prices.

INDY is a large cap centric fund that follows the CNX Nifty Index, which seeks to track the performance of the largest 50 Indian stocks. The ETF has amassed $724.4 million. INDY is up nearly 34% this year and has a Zacks ETF Rank #1 (Strong Buy) rating with High risk outlook.

WisdomTree Japan Hedged Equity Fund (DXJ)

EIA noted that Japan is the world's third largest net oil importer. Due to its scarce resources, Japan needs to import almost all its energy requirements. Notably, the nation’s trade deficit went up 1.6% in September despite a 6.9% spike in exports (read: 2 Hedged Japan ETFs to Buy After the Surprise BOJ Stimulus).

An already massive stimulus program and a fresh liquidity injection to help a nation which is presently suffering a technical recession, will devalue the yen. While a multi-year low currency helps export-centric nation like Japan, it acts as a dampener when it comes to paying huge import bills. Thus, falling oil prices should act as a savior for the presently sagging Japanese economy.   

DXJ is one of the largest and most popular ETFs in the Japan ETF space with an asset base of $10.3 billion. The fund provides exposure to Japanese stocks while at the same time providing a hedge against any fall in the Japanese yen. The ETF has added 7% so far in the year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Inside The Top Ranked Japan Hedged Equity ETF).

WisdomTree Korea Hedged Equity Fund (DXKW)

South Korea too depends heavily on crude oil imports trading in about 97% of its requirements. With the greenback gaining about 8.7% strength relative to its currency so far in the second half, oil import bill remains a cause of concern for the nation. Quite expectedly, falling oil prices could have a major impact on its economy, indicating some gain in store for this country ETF as well.

For investors seeking exposure to Korean equities, while at the same time hedging for fluctuations between the value of the U.S. dollar and the Korean won, DXKW is a wise bet. The fund, however, is not a popular choice in the space having amassed only $8.3 million in assets.

The ETF has a Zacks ETF Rank #1 with a Medium risk outlook.

Bottom Line

Investors should enter or add positions in this trio of nations if they expect cheaper oil process for long as this will bring down the cost for these oil-importing countries. In any case, the products are expected to outperform on the internal drivers, if we rule out the oil issues. While a shift in political power could take India to new heights, stimulus should make it easy for hedged Japan and Korea ETFs.

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Read the analyst report on INDY

Read the analyst report on DXJ

Read the analyst report on DXKW

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