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EM Currency Rally Fuels These ETFs

Emerging markets currencies began tumbling in May 2013 in the aftermath of the taper tantrum induced by the Federal Reserve, chasing investors from developing world equities and debt in addition to currencies.

With the WisdomTree Emerging Currency Strategy Fund (CEW) up almost 5% over the past two months, local currency bond and equity-based exchange traded funds are going along for the ride

The South African rand “and its peers such as the Turkish lira, Indian rupee, Indonesian rupiah and Brazilan real — at the forefront of last year’s selloff – have stabilised from the lows hit in recent months,” reports Sujata Rao for Reuters.

Although interest rates have been on the rise in the developing world those higher rates have helped shore up previously downtrodden currencies such as the real, rupiah and rupee.

Brazil recently hiked its benchmark rate to 11% and the WisdomTree Brazilian Real Strategy Fund (BZF) is higher by almost 13% since the start of February. In late January, the Turkish central bank raised its overnight lending rate to 12% from 7.75% and more than doubled the overnight borrowing rate to 8% to 3.5%. [Central Bank Tries to Save Turkey ETF]

Rates in India and Indonesia are also considered high by the standards of developed markets. The WisdomTree Indian Rupee Strategy Fund (ICN) and the Market Vectors-Rupee/USD ETN (INR) are both up more than 6% since the start of February.

CEW is essentially an equal weight ETF as the 15 currencies held by the fund range in weights of 6.2% to 7.1%. The Fragile Five currencies – the Turkish lira, real, rupiah, rand and rupee – combine for about 35% of the ETF’s weight, according to WisdomTree data.

Higher interest rates in emerging economies have also served another purpose: Punishing those that dare short those currencies with higher costs of carry.

“Foreigners cut net short wagers on the Brazilian real to $21.6 billion on April 2 from a record $28.1 billion on Jan. 23, according to data from Sao Paulo-based BM&FBovespa, South America’s largest exchange. Overseas investors in the Chilean peso forwards market reduced their net short positions to $13.3 billion on April 1 from an all-time high of $15.8 billion on March 6, central bank data show,” according to Bloomberg.

Conservative investors looking for emerging markets currency exposure can consider the actively managed PIMCO Foreign Currency Strategy ETF (FORX) . Up almost 5% in the past 60 days, FORX allocates nearly 40% of its weight to the real, Mexican peso, Russian ruble and rupee.

FORX tempers its emerging markets exposure with allocations to the British pound, U.S. and New Zealand dollars and Nordic currencies, among other developed market offerings.

PIMCO Foreign Currency Strategy ETF