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Diverging EM Currencies Makes ETF Less Bad


The widest divergence between the best and worst emerging markets currencies in two years is not much of a problem for the WisdomTree Emerging Currency Fund (CEW) .

CEW, an ETF previously plagued by fears of Federal Reserve Tapering and widening current account deficits in countries ranging from India to Indonesia to South Africa, is down 5% year-to-date, but that loss is just 0.05% over the past 90 days. Since early September, the ETF has traded modestly higher. [Rising Rates Killing EM Currencies]

CEW offers exposure to 15 developing world currencies with weights ranging from 6.42% to 6.87%, essentially making the ETF an equal-weight play. That has kept the fund stuck in neutral to a degree, but when it comes to emerging markets currencies in 2013, neutral is not a bad place to be.

“The five best-performing developing currencies since June have gained an average 4.4 percent, led by South Korea’s won and Poland’s zloty, compared with a 6.8 percent loss for the worst performers,” reports Ye Xie for Bloomberg.

China’s yuan, another stout emerging markets currency, is CEW’s largest holding. The yuan, won and zloty combine for 24.3% of CEW’s weight. Strength in those currencies is a testament to the fact that investors have bid up the currencies of countries with current account surpluses, shrinking deficits or both. [EM Currencies: Still All About the Fed]

Despite Bank Indonesia’s rate hike campaign, the country’s rupiah is still the worst currency in the emerging world this year. The Indian rupee has been one of the worst as well. Combine those factors with persistent outflows from Indonesian equities and it is clear that account deficit countries are struggling to attract capital as their currencies languish.

The Jakarta Stock Exchange Composite Index is trading close to the lower end of its historical range, but it is not as cheap as it was during the global financial crisis and Indonesian stocks still look somewhat pricy relative to the broader emerging markets universe. [Timing Not Quite Right for Indonesia ETFs]

The rupee, rupiah, South African rand and Turkish lira, all among this year’s worst emerging markets currencies, combine for over a quarter of CEW’s weight.

On the more positive side of the ledge, Mexico is seen as less reliant on external financing than some other developing markets. Additionally, Malaysia’s third-quarter account surplus grew to $3.3 billion, according to Bloomberg.

Mexico’s peso and Malaysia’s ringgit combine for 13.5% of CEW’s weight.

WisdomTree Emerging Currency Fund

ETF Trends editorial team contributed to this post.

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.