Turkey ETF was one of the best performing ETFs last year, with a whopping return of about 63%, as global investors continued to pour money into the economy that had shown remarkable resilience to the events in the Euro-zone. (Read: 3 Top Ranked Europe ETFs to Buy Now)
The investor sentiments towards the country changed rapidly in May after the Federal Reserve hinted at scaling back its asset purchases. The ETF suffered a decline of about 36% between May and September as foreign investors fled the country.
Even though the stock market has recovered after the ‘no-taper’ announcement by the Fed, it still remains down 3.4% year-to-date. The currency has been one of the worst performing this year, down about 12% against the US dollar, despite the central bank’s massive interventions in the foreign exchange markets. By some estimates, the central bank spent more than 15% of their foreign exchange reserves in trying to protect the currency.
Further, while other worst affected emerging nations tried to attract some of the foreign money back by raising rates, Turkey’s government continues to pressure the central bank to keep the rates low. However, the central bank guided the money market rate higher last week as the inflation rate continues to be way off its official target. (See: 5 Best Performing Active ETFs)
While the market seems to have stabilized as of now, we will most likely see another round of panic when the taper talk returns. With its current account deficit at 7% of the GDP, Turkey remains one of the emerging markets most vulnerable to the end of the cheap money policies in the US.. The deficit is mainly being financed by short-term capital flows (hot money- which can change direction quickly). Also, external debt of the country has ballooned to about $350 billion, half of which is short-term debt.
Further, social unrest in the country and the government’s heavy-handed response to the protests have further driven foreign investors away from the country. With the presidential elections due next year, the situation is unlikely to change anytime soon. (Read: China ETFs Jump on Government Reform Afterglow)
iShares MSCI Turkey Investable Market Index (TUR)
TUR tracks the MSCI Turkey Market Index, which is a capitalization weighted index that aims to capture 99% of the Turkey equity market. The fund was launched in March 2008 and has attracted $438 million in AUM so far.
The fund charges 0.61% annually for expenses. In terms of sector exposure, financials constitute almost half (48%) of the assets, followed by Industrials (14%) and Consumer Staples (12%). Though the ETF currently has 97 holdings, it is top-heavy, with the top 10 holdings accounting for almost 60% of the assets.
The product is down about 14% year-to-date.
Investors seeking exposure to Emerging Markets have a number of better options than Turkey. Emerging Countries with lower dependence on foreign funds, sound economic fundamentals and strong policy frameworks like Mexico (EWW) and South Korea (EWY) may emerge as winners in the longer-term. (Read: Emerging Markets--How to Pick Winners?)
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