Economists and market participants often say it takes a quarter or two, sometimes longer, for the impact of interest rate cuts to take shape within an economy. However, financial markets live in an up-to-the-minute world. Traders want results and they want those results now, not in a few months.
The need for immediate gratification could explain why some have been flummoxed by the lackluster responses by select ETFs to a recent spate of interest rate reductions. Central banks from Australia to India to Israel to Poland and a batch of others have been lowering borrowing costs.
Investors can find some comfort in knowing ETFs tracking those countries may eventually reap the rewards of lower rates. For now, the following ETFs look to be in post-rate cut funks.
iShares MSCI Australia Index Fund (EWA)
On May 7, the Reserve Bank of Australia lowered that country’s overnight cash rate by 25 basis points to a record low of 2.75%. That rate cut, latest in a long line dating back to 2011, was in part prompted by the Australian dollar’s continued strength against the U.S. dollar and other major currencies. The rate cut had the part of the desired impact as AUD/USD has since fallen below parity.
However, things have been different at the equity level. Amid some troubling signs for the Australian economy and slack Chinese data points, EWA has fallen 5.6% since the rate cut. [ETFs For Australia]
iShares MSCI South Korea Capped Index Fund (EWY)
The Bank of Korea stepped into the rate cut party on May 9, lowering benchmark rates to 2.25% from 2.5%. BoK weaker-than-expected growth in China – South Korea’s largest trading partner, slow growth in Europe and lower consumer price inflation. Or the central bank could have come right and said the weak yen has become a problem for South Korean exporters. Since the cut, EWY has lost 2.1% and the won has remained strong against the yen. [South Korea ETF Lower After Rate Cut]
iShares MSCI Israel Capped Investable Market Index Fund (EIS)
The Bank of Israel not only lowered rates on May 13, but revealed a plan to purchase $2.1 billion in foreign currency in an effort to weaken the country’s currency, the shekel. At 1.5%, Israel’s benchmark interest rate resides at a three-year low, but more cuts could be in store because of the strong currency. Whether or not another cut works remains to be seen, but investors may find out sooner than later as the Bank of Israel meets again May 27. EIS is down 0.5% since the most recent rate cut. [Will Twice Be Nice For Israel ETF?]
Market Vectors Poland ETF (PLND)
The Narodowy Bank Polski, Poland’s central bank, pared its seven-day reference rate by 25 basis points to 3% on May 8. Like the other countries on this list, Poland could be a repeat rate-cutter as swaps on Polish sovereigns are pricing in at least another 50 basis points in rate reductions. Maybe future cuts will prove meaningful to PLND. For now, the ETF is down 2.4% since May 8.
ETF Trends editorial team contributed to this story.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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