A prominent theme tied to emerging markets in recent months has been a spate of central bank actions. Primarily, developing world central banks have been raising interest rates as a means of defending sagging currencies.
Conventional wisdom dictates that it usually takes several months for an interest rate change, in either direction, to make an impact. However, price action throughout most of the emerging markets complex this year proves investors are less than impressed by the recent spate of developing world rate hikes. [Broken BIITS: Rate Hikes Not Boosting Confidence in EM ETFs]
That is not surprising as rate hikes mean higher borrowing costs, in turn exposing the vulnerabilities of emerging markets that borrowed heavily in foreign currencies. Still, some exchange traded funds tracking developing economies have benefited from recent rate action. Most, however, have not.
What follows is a list of emerging markets ETFs, the current benchmark borrowing rate in that country and the 2014 performance of each fund. All rate data is courtesy of CentralBankNews.com.
iShares MSCI Brazil Capped ETF (NYSEArca: EWZ)
Interest rate: 10.5%
2014: Down 9.5%
Comment: Brazil’s central bank raised rates by 50 basis points in mid-January. Since Jan. 15, EWZ, the largest Brazil ETF, is off 8.4%, cementing its status as one of 2014’s worst-performing non-leveraged ETFs. A double-digit borrowing rate is seen as ominous for a country with slowing economic growth and default rates that are starting to inch higher. [Another Day, Another Time for This EM ETF]
WisdomTree India Earnings ETF (NYSEArca: EPI)
Interest rate: 8%
2014: Down 3.8%
Comment: India last raised rates on Jan. 27, a 25 basis-point move to get to 8%. Since then, EPI and some rival India ETFs have traded slightly higher. EPI has been this year’s best performer among the four major BRIC single-country ETFs, which is to say EPI has been significantly less bad than comparable Brazil, China and Russia ETFs.
Market Vectors Indonesia ETF (NYSEArca: IDX)
Interest rate: 7.5%
2014: Up 3.7%
Comment: Indonesia’s last rate hike, which was 25 basis points, occurred on Nov. 12, 2013 and the performance of IDX this year indicates that increase is starting to have some positive effects. The real allure of Indonesia ETFs comes by way of the country’s improving current account situation. Indonesia has posted a surplus in the last three months of 2013. [EM Account Surplus Trade Yields Mixed Results]
iShares MSCI Turkey ETF (NYSEArca: TUR)
Overnight lending rate: 12%
2014: Down 8.3%
Comment: On Jan. 28, 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% in one of the boldest moves by any central bank in recent memory to defend a flailing currency. While the Turkish economy still faces headwinds, TUR is up 2.4% since Jan. 29.
iShares MSCI South Africa ETF (NYSEArca: EZA)
Interest rate: 5.5%
2014: Down 8.4%
Comment: South Africa surprised markets with a 50-basis point increase the day after Turkey’s rate hike. EZA initially reacted negatively to the news, but the ETF has traded slightly higher since Jan. 29. It is not all good for South Africa there as speculation has increased Nigeria will become Africa’s largest economy, perhaps as soon as this year.
iShares MSCI Thailand Capped ETF (NYSEArca: THD)
Interest rate: 2.25%
2014: Up 6.2%
Comment: Following a rate CUT of 25 basis points to 2.25% in late November, THD has been a pleasant surprise among emerging markets ETFs this year. THD’s 6.2% year-to-date gain is all the more impressive when considering the country’s battle with political volatility.
iShares MSCI Chile Capped ETF (NYSEArca: ECH)
Interest rate: 4.5%
2014: Down 12.4%
Comment: Chile cut rates by 25 basis points in late November, but ECH proves that rate reduction has either been ineffective or glossed over by investors’ concerned by China’s waning copper demand. Chile is the world’s largest producer of the red metal. Investors hoping for another rate cut may want to think twice because inflation is creeping higher in Chile. ECH is one of the 10 worst non-leveraged ETFs this year.
Market Vectors Egypt ETF (NYSEArca: EGPT)
Interest rate: 8.25%
2014: Up 12%
Comment: The Egyptian central bank pared rates by 50 basis points on Dec. 5. That move, combined with increased political stability in North Africa’s largest economy, is paying off as EGPT is this year’s best non-leveraged, single-country emerging markets ETF. [A Surprising Region Leads Foreign ETFs in 2014]