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Turkey Issue Hurt EMs in August: 5 Least-Hurt ETFs

Sanghamitra Saha
U.S. monthly inflation came in at the highest in nine months in October. This puts TIPS ETFs in focus.

The month of August has been unsettling for the emerging markets (EM). In any case, the bloc has been under pressure of late hurt by the double whammy of a hawkish Fed and trade war fears between the United States and China. The MSCI Emerging Markets Index tanked to the lowest level in 10 months, per Bloomberg, at the end of Q2 (read: $8 Trillion Worth of EM Stocks in a Bear Market: ETFs to Play).

And to add to the woes, the Turkey-induced upheaval in mid-August sent shock waves in the emerging market bloc, leading iShares MSCI Emerging Markets ETF EEM to record its yearly low of $41.13 on Aug 15. So far this year, the fund is down about 8.1% (against the gain of a same measure in the S&P 500) and has lost about 1.1% past month versus 4% advancement in the S&P 500.

A Bloomberg currency index that looks to follow carry-trade returns from eight emerging markets, funded by short positions in the dollar, has declined more than 5% since end-July, is likely to record its largest August plunge on record. WisdomTree Emerging Currency Strategy ETF CEW has retreated 3.8% in the past month (as of Aug 29, 2018).

Inside the Pain in EMs in First Half of August

The Turkish economy and currency are caught in a web of issues this year. So far, double-digit inflation, aftereffects of policy tightening in the United States, political woes and a complete authoritarian takeover of president Tayyip Erdogan and his influence over monetary policy have bothered the economy. But a diplomatic tussle with the United States dealt a blow to the economy this month. iShares MSCI Turkey ETF TUR is off about 26% this month (read: Most-Hurt EM ETFs on Turkey Upheaval).

The issue had a spiraling effect on the global market with EM currencies following the course of the Turkish lira’s downward spiral. The crisis in the currency makes it pricier for Turkish borrowers to pay back foreign-currency loans. So, there was lack of confidence in broad-based EM assets.

Relief Rally in Late August on Abating Trade Tensions

Global markets rejoiced in the U.S.-Mexico trade deal at month end. On Aug 27, the United States and Mexico agreed on a new bilateral trade deal, which will likely rewrite the North American Free Trade Agreement (NAFTA). Meanwhile, U.S.-China trade talks have been put on hold, according to U.S. Treasury Secretary Steven Mnuchin. These have worked wonders for global markets, bringing relief to many emerging markets (read: U.S.-Mexico Trade Deal to Revamp NAFTA: ETF Winners).

ETFs in Focus

Against this backdrop, below we highlight a few broad EM ETFs that have lost the least in the past month (as of Aug 29, 2018). 

Legg Mason Low Volatility High Dividend ETF LVHD – Up 3.2%

The underlying index – the QS Low Volatility High Dividend index – provides stable income through investment in stocks of profitable U.S. companies with relatively high dividend yields, lower price and earnings volatility. Utilities (24.95%), Consumer Staples (18.56%), Real Estate (14.73%) and Consumer Discretionary (11.65%) take the top four spots of the fund.

Xtrackers MSCI Emerging Markets Hedged Equity ETF DBEM – Up 0.9%

The underlying index provides exposure to equity securities in the global emerging markets, while at the same time mitigating exposure to fluctuations in currencies. Information Technology (26.64%) and Financials (22.37%) have double-digit exposure to the fund. China (29.75%), South Korea (13.92%) and Taiwan (11.58%) take the top three positions in the fund.

iShares Currency Hedged MSCI Emerging Markets ETF HEEM – Up 0.5%

The fund looks to lower the impact of foreign currencies, relative to the U.S. dollar. Here also, China (30.5%), South Korea (14.09%) and Taiwan (11.67%) take the top three positions in the fund while Information Technology (26.8%) and Financials (22.84%) have a double-digit exposure each.

iShares Edge MSCI Min Vol Emerging Markets ETF EEMV – Up 0.03%

The fund is composed of emerging market equities that have lower volatility characteristics relative to the broader emerging equity markets. China takes the top spot with about 26% weight, followed by Taiwan (15.97%). Financials (25.1%) and Information Technology (22.50%) are the top two sectors.

FlexShares Currency Hedged Morningstar EM Factor Tilt Index TLEH – Up 0.4%

The underlying index of the fund measures the performance of stocks that enhance exposure to emerging market equities by tilting the portfolio toward the long-term growth potential of the smaller-cap and value segments. China (29.95%), South Korea (16.15%) and Taiwan (13.40%) are the top three countries of the fund. Financials (24.5%), Information Technology (15.64%), Materials (11.6%) and Consumer Discretionary are the top four sectors.

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LM-LO VOL HIDIV (LVHD): ETF Research Reports
ISHRS-MSCI TURK (TUR): ETF Research Reports
ISHARS-MS EMMV (EEMV): ETF Research Reports
WISDMTR-EMG CUR (CEW): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-CURR HDG (HEEM): ETF Research Reports
DEUTS-XT MS EM (DBEM): ETF Research Reports
FLEXS-CH MEMFT (TLEH): ETF Research Reports
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