Emerging markets stocks and emerging markets ETFs, such as the Vanguard FTSE Emerging Markets Index ETF (NYSEArca: VWO), are being crimped by the resurgent dollar and that scenario may not abate anytime soon.
On a local currency basis, the FTSE Emerging Markets Index, VWO’s underlying benchmark, is struggling this year. However, when that index’s performance is converted into dollar terms, the scenario facing domestic investors, that benchmark looks even worse.
“Broad-based dollar strength has weighed on US investor returns in international equities YTD,” according to FTSE Russell. “When US investors buy foreign stocks based in their local currencies, their returns suffer when these currencies fall against the dollar. As such, the US greenback’s strength in 2018 relative to both developed and emerging market currencies has acted as a major headwind for US investors investing in these markets.”
VWO is down 12.26% year-to-date. The ETF features large allocations to China, Taiwan and India, among other developing economies.
Other Issues
Amid trade war speculation, Chinese stocks are floundering, pressuring an array of cap-weighted emerging markets ETFs that feature significant weights to the world’s second-largest economy. China is by far VWO’s largest country weight.
A stronger dollar raises external financing costs for developing economies and usually leads to lower commodities prices, a relevant point because many developing commodities are major commodities exporters.
“Several persistent macroeconomic trends have boosted the US dollar. These include faster economic growth relative to other developed and emerging markets, higher interest rates, and more aggressive central bank monetary policy tightening. None of these macro trends show signs of changing in the near term,” said FTSE Russell Managing Director Alec Young.
For more ETF trends in emerging markets, click here.
Tom Lydon’s clients own shares of VWO.