Do Global Exchanges Follow Country ETFs - Up and Down?

By Carl Delfeld of the Chartwell ETF Advisor and Chartwell Partners Wealth Management

Publicly-traded stocks of global stock exchanges, like many country exchange-traded funds, had a great year in 2007 rising about 70 per cent due to record trading volumes.

But this year is a different matter as the Dow Jones Global Exchanges index has lost 15 per cent of its value already this year, in spite of a recent rally according to the Financial Times. Even though Deutsche Börse announced a tax break that would enhance this year’s earnings by an estimated 10%, its shares remained flat as a pancake though overall, global exchange shares have recently rallied.

This may present an opportunity just like lower prices for many high quality country ETFs like Singapore (EWS) and the Netherlands (EWN). Analysis of the past 30 years by Citigroup shows that volumes in cash equities on the New York Stock Exchange actually increased during recessionary periods.

Exchange shares attract investors because it is a fixed-cost business. Once an exchange has earned enough revenue from tariffs on trading, the additional cost to it of handling ever-larger volumes is marginal so additional revenues are almost pure profit. This means that the companies are normally cash cows. Plus the global exchange market remains abuzz with mergers and consolidation activity which may provide some price support.

But be careful as the valuations of exchanges is both murky and tricky. The sector as a whole is still priced for growth, at about 18 times 2009 earnings.

Chartwell Partners Wealth Management has developed a Global Exchange folio with publicly-traded exchanges weighted in a basket. It will be interesting to see if it outperforms Chartwell's Country ETF Rotation folio.