3 Currency ETFs Crushed in Emerging Market Rout

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Emerging markets have faced some extremely rough trading in recent weeks as losses have begun to pile up for the space. Many in the developing world have seen losses in excess of 10% in just the past week alone, with some losing close to 20% in the past few weeks.

A big reason for this crash has been the taper talk in the U.S. and the impact of this policy on emerging market capital flows. With a bit of a risk off trade happening, the appeal of emerging markets have been dulled, especially as yields continue to rise for safer American government debt (read 3 Currency ETFs Hit Hard by Taper Talk).

Beyond the taper, current account deficits and political woes have also impacted these markets. Investors are growing concerned about the political situation in many countries as inflation picks up, while current account deficits aren’t inspiring confidence either.  

These trends have all combined to push investors out of emerging market securities and especially out of currencies. These are now plunging against the dollar and other developed market counterparts, dulling the appeal of equity-based investments in these denominations as well.

Market Impact

In the currency ETF world, we have seen some modest losses in a number of emerging market-focused currency funds. Below, we highlight three that have been most impacted by the trend, and that could see continued losses if uncertainty remains in many emerging markets:  

WisdomTree Indian Rupee Fund (ICN)

The Indian rupee is trading at an all-time low against the dollar, and some are worrying that this trend can continue. This may happen if Indian growth, which was at 9% not too long ago, comes in at the projected rate of just 5.5%, or if inflationary pressures remain a problem for the nation (see Rupee Slide Hits Small Cap India ETFs).

This product, along with INR, dominate the extremely small ETF niche of the Indian rupee. ICN looks to provide exposure to changes in the Indian rupee against the dollar, moving higher as the rupee appreciates against the greenback.

The product has been under severe pressure so far in 2013, having lost more than 12.6% in the YTD time frame. Meanwhile, in the past month, ICN has lost about 7.6% on continued Indian market weakness.

WisdomTree Brazilian Real Fund (BZF)

Brazil has faced protests and worries over growth this year, as inflation pressures are bearing down on the South American giant. More recently, Brazil’s central bank has been intervening in the markets, suggesting that trouble is building in the real’s market.

This fund is the only product giving investors exposure to the movements of the Brazilian real against the U.S. dollar. The ETF sees somewhat below average volume, while fees come in at 45 basis points a year for this product (read The Key to International ETF Investing).

Year-to-date, this product has lost a little over 13% as broad trends have crushed the Brazilian market. Recent trading hasn’t been much better, as BZF has lost about 6.9% in the past one month.

WisdomTree Emerging Currency Fund (CEW)

The trends haven’t been limited to just Brazil and India though, as a number of other emerging currencies have been hit hard. These include the Turkish lira, as well as a number of other Asian currencies, suggesting that this hasn’t been an isolated trend.

For a more diversified play on emerging market currencies, investors have CEW. This ETF is relatively popular with investors as trading volumes reach into the 100,000’s and the assets under management is just under $200 million.

Current holdings are tilted towards Asia, although Latin America and emerging Europe receive sizable allocations as well. The product does utilize an equal weight strategy though, so no single currency takes up more than 9% of the product, leaving holdings of 12 different currencies in CEW (see all the Currency ETFs here).

The diversified exposure has helped CEW outperform lately, as the YTD performance comes in at -6.5%. Meanwhile, over the past one month, the ETF has lost about 3.1%, putting it below a number of other basket currency products.  

Bottom Line

Trading in emerging markets has been very tough lately as a number of factors have pushed these developing nations lower. Chief among them are worries over the taper in the U.S. market, current account deficits, as well as a combination of low growth and high inflation.

This mix has caused big losses in a number of equity emerging market ETFs, but also their currency ETF cousins too. This has especially been the trend in the case of ICN, BZF, and CEW, as these have led the emerging market currency world lower.

Should the poor outlook for emerging markets remain intact, look for these three to continue to underperform. Trading could remain quite sluggish for this group, so the best course of action might be to stay away until more is known about the taper or until a fresh catalyst can appear for these rocky markets.

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