Yellen’s Help for EM ETFs May be Fleeting

November 18th at 7:30am by Tom Lydon

Emerging markets exchange traded funds holding bonds, currencies and equities finished higher last week after Janet Yellen, President Obama’s nominee to be the next Federal Reserve leader, made comments that some market participants inferred as a sign the Fed’s easing program could remain in place for far longer than previously expected.

However, the help for some downtrodden developing world currencies could be fleeting because a few of this year’s worst offenders have found it difficult to breakout out of their now long downtrends. Last week, volatility crept back into the India rupee and the Indonesian rupiah, 2013’s worst-performing emerging market currency, hit a two and a half year low against the dollar last Wednesday, Delphine Strauss and Robin Wigglesworth report for the Financial Times.

The WisdomTree Emerging Currency Fund (NYSEArca: CEW) was still able to muster a modest gain last week because although the ETF is allocated to some of the worst-performing developing world currencies, such as the rupiah, the fund includes decent allocations to some of the best. That list includes the Polish zloty and South Korean won. [Diverging EM Currencies Make ETF Less Bad]

Even with Yellen’s efforts to assuage jittery investors, some emerging markets currencies reside below their September recovery levels, according to the FT, indicating that weakness for some is more trend than fad.

What is most vexing about persistent weakness in emerging currencies is that Fed tapering does not appear to be in play in the near-term and it was tapering speculation that sent so many developing world currencies tumbling earlier this year. [EM Currencies: Still All About the Fed]

It seems unlikely the Fed will taper in December and a case can be made that even March 2014 is not a plausible time to taper because the dovish Yellen will have only been on the job a few weeks at that point. Current Fed Chair Ben Bernanke retires in late January.

Since the start of November, investors have pulled $2.3 billion from the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets ETF by assets, and $183.3 million from the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB), the largest emerging markets bond ETF.

WisdomTree Emerging Currency Fund

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EMB.

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.