2 Emerging Market Currency ETFs Crushed by Oil Rout

Emerging market currencies are facing tough times and have piled up heavy losses in recent weeks. This is especially true as the index tracking 20 key exchange rates has fallen to levels not seen in more than a decade. The index has lost in double digits so far this year and is thus heading for the biggest annual decline since 2008.

In particular, currencies of resource-rich emerging economies like Russian ruble are leading the decline. A big reason for the crash has been lower crude oil prices, which tumbled about 40% over the past six months to six-year lows, and a surging U.S. dollar, which is hovering around its five-year high (read: Oil ETFs Crash As Crude Touches Multi-Year Low).

The currency war has escalated as a number of countries have chosen loose monetary policies to stimulate growth and prevent deflationary pressures. This is in stark contrast to the U.S. policy where the Fed has tightened its stimulus program by wrapping up its QE3. The diverging central bank policies have propelled the U.S. dollar to multi-year highs.

Improving U.S. economic activities and the strengthening job market have raised speculations over faster-than-expected interest rates hike that are pulling capital out from the emerging market stocks to the American stocks, leading to decline in developing nation currencies. Additionally, slowing growth, conflict in Russia with the West, and concerns about China’s financial stability are also weighing heavily on the currencies.

While sliding currencies bring good news for some countries making their exports competitive, these make imports expensive driving up inflation, increasing the cost of dollar-denominated debt and eroding investor confidence. Further, current account deficits are still high and dulling the appeal of equity-based investments in these denominations and the prospect for the emerging currencies.

Market Impact

In the currency ETF world, we have seen some modest losses in a number of emerging market-focused currency funds over the past three months. Below, we highlight two funds that have been the most impacted by the trend, and that could see continued losses if oil price continues to tumble and U.S. dollar keeps surging (read: 3 Excellent ETFs to Play the Dollar Surge):

WisdomTree Brazilian Real Strategy Fund (BZF)

This fund seeks to achieve total returns reflective of both money market rates in Brazil available to foreign investors and changes in value of the Brazilian Real relative to the U.S. dollar. The product has amassed $27.5 million in its asset base while trades in light volume of under 20,000 shares per day on average. It has an expense ratio of 0.45% and was down about 11% in the same time period. The fund has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook.

WisdomTree Emerging Currency Strategy Fund (CEW)

This fund provides a diversified play on emerging market currencies. It seeks to achieve total returns reflective of both money market rates in selected emerging market countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar.

The product invests in 15 currencies – Mexican Peso, Brazilian Real, Chilean Peso, Colombian Peso, South African Rand, Polish Zloty, Russian Ruble, Turkish New Lira, Chinese Yuan, South Korean Won, Indonesian Rupiah, Indian Rupee, Malaysian Ringgit, Philippine Peso and Thai Baht. While it utilizes an equal weight strategy, no single currency takes up more than 7.4% (see: all currency ETFs here).

The fund has been able to manage assets worth $81.5 million and trades in a lower volume of 35,000 shares a day. It charges 55 bps in fees per year from investors. The ETF was down 7.3% over the past three months.

Bottom Line

Trading in emerging markets has been rough lately, as a number of factors have pushed these developing nations lower. Chief among these are worries over the rise in U.S. interest rates, lower oil prices and slowing economic growth. This mix has caused big losses in a number of equity emerging market ETFs and their currency ETF cousins and the trend is likely to continue in the short term.

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