It is no secret that 2015 has been another glum year for emerging markets equities and exchange traded funds. The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets ETFs by assets, are off an average of 8% year-to-date.
That is positioning EEM and VWO to finish lower on an annual basis for a third consecutive year and the fourth time in the past five years. Recently, emerging markets ETFs of nearly all stripes were pressured by China’s decision to devalue the yuan.
China’s currency devaluation is aimed at propping up exporters in the world’s second-largest economy amid slack economic data. Beijing revealed that exports declined 8.3% in July, the largest drop in four months and worse than the expected 1% dip. Exports to the Eurozone plunged 12.3% in July and shipments to the U.S. fell 1.3%. [Violent Turn for the Yuan]
“The yuan devaluation may signal that China’s efforts to rebalance its economy toward greater growth may be proving more challenging than anticipated. According to some estimates, the trade-weighted yuan has increased by over 11% in the past year, and exports have been falling sharply — down 9.2% in July. A weaker yuan may help turn growth around by boosting China’s exports, but a roughly 2% currency devaluation is only a small step toward that goal,” said Invesco in a recent research note.
However, the options market in EEM is signaling something interesting could be afoot.
“Implied correlation, which attempts to measure this phenomenon, jumped to 80% on Wednesday. A high implied correlation means that EEM’s volatility is spiking much more than the volatility of the underlying country ETFs. The five other times this year EEM had a high implied correlation were followed by an average increase of 8% over the next month, according to UBS,” reports the Wall Street Journal.