Rising Dollar Could Keep Pressure on EM ETFs
This article was originally published on ETFTrends.com.
The U.S. dollar may have more room to run, potentially weighing on emerging markets and related exchange traded funds.
Over the past three months, the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares Core MSCI Emerging Markets ETF (IEMG) , the two most popular and largest EM-related ETFs on the market, dipped 4.9% and 4.1%, respectively. Meanwhile, the U.S. Dollar Index has strengthened to 93.55, its highest level since the start of the year.
"In the short term, I think the dollar probably would be a stronger rather than a weaker currency," Simon Derrick, who serves as chief currency strategist at BNY Mellon, told CNBC.
Furthermore, Derrick warned that government yields may be going up, which would further weigh on emerging market USD-denominated debt securities. European Central Bank Chief Economist Peter Praet said the bank would shortly debate ending its decade-long program of bond buying by 2018's close.
"It means there may be less investors searching for yields in the U.S., which in turn should push yields higher," Derrick said, referring to U.S. Treasury bonds.
Related: Selloff In Emerging Markets Will Only Get Worse
The strategist argued that emerging countries exposed to high amounts of dollar-denominated debt will find it more expensive to borrow cash.
"It's going to play out in the yen, in Turkey, Brazil, Mexico — those are the currencies that are going to suffer in the same way they did a few weeks ago," Derrick said.
Inverse & Bearish ETF Plays to Hedge Risk
Investors who are wary of further pullbacks in the emerging markets may also consider inverse or bearish ETF plays to hedge risk. For instance, the ProShares Short MSCI Emerging Markets (EUM) takes the inverse or -100% daily performance of the MSCI Emerging Markets Index, the benchmark to EEM. The ProShares UltraShort MSCI Emerging Markets (EEV) follows the -2x or -200% daily performance of the Emerging Market Index. Additionally, the Direxion Daily Emerging Markets Bear 3x Shares (EDZ) tracks the -3x or -300% performance of the benchmark.
"I think we're going to see a lot more pressure coming onto emerging market currencies once again and the market isn't focused on it yet," Derrick added.
For more information on the developing economies, visit our emerging markets category.
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