Nothing seems to be going right for marquee emerging markets ETFs this year. Whether its diversified funds, country-specific ETFs or bond funds, it is hard to find an ETF with the emerging markets label that has recently shown positive signs. Add emerging markets currency ETFs to that list.
“Emerging Market currencies benefit from a wealth of positive factors, such as: structural trends, faster growth, favorable demographics, falling inflation rates, healthy balance sheets and capital inflows,” said Credit Suisse earlier this year. Those positive traits remain in place throughout the developing world, but that has not meant much this year at the currency level.
Renewed interest in the U.S. dollar as a safe-haven coupled with rejection of riskier developed market currencies such as the dollars of Australia, Canada and New Zealand, have sent scores of emerging markets currencies tumbling. Active interest rate-cutting campaigns by developing world central banks have not helped matters, either. [Currency Diversification With ETFs]
The confluence of negative factors is weighing on the WisdomTree Emerging Currency Fund (NYSEArca: CEW). CEW, which has been around since May 2009, tracks the Mexican Peso, Brazilian Real, Chilean Peso, Colombian Peso, South African Rand, Polish Zloty, Russian Ruble, Turkish New Lira, Chinese Yuan, South Korean Won, Indonesian Rupiah, Indian Rupee, Malaysian Ringgit, Philippine Peso and Thai Baht.
That is another way of saying the ETF is being hit from a variety of angles this year. CEW’s 15 constituent currencies are basically equal-weighted with allocations ranging from 6.36% to 6.89%. In the current environment of weakness across the emerging market currency board, the equal-weight approach is a drag on the fund. [Alternative ETFs]
This is just a smattering of the issues affecting CEW: On Monday, the Indian rupee touched a record low against the U.S. dollar, sending the WisdomTree Indian Rupee Fund (NYSEArca: ICN) down 1.6%. Amid concerns about stagflation, the WisdomTree Brazilian Real Fund (NYSEArca: BZF) is down 5.5% in the past month. Those two currencies combine for just over 13% of CEW’s weight. [Rupee’s Plunge Could Affect Several ETFs]
On Monday, Indonesian rupiah forwards fell to their biggest discount to the spot price of the currency since 2011, according to the Jakarta Globe. The Philippine Peso is trading at its lowest levels against the greenback and the same can be said of the Thai baht. Those three currencies combine for about 20% of CEW’s weight.
Falling precious metals prices are weighing on the South African Rand as falling copper prices are pressuring the Chilean Peso and the list goes on.
CEW recently fell below support at $20.25, implying that those that are looking to buy this dip should exercise some patience and wait for lower prices. Emerging markets currencies fit in the “higher-beta” category, meaning that when they bounce, they could do so in rapid fashion. Problem is that bounce probably will not materialize anytime soon.
WisdomTree Dreyfus Emerging Currency ETF
ETF Trends editorial team contributed to this report.