Emerging market (EM) ETF investing is currently in a tight spot. The dollar strength, rising rates in the United States, capital outflows, a slump in China’s economy, rising inflation and a debacle in Russia investing have all added up to the EM crisis. Emerging market ETF
Vanguard FTSE Emerging Markets ETF ( VWO Quick Quote VWO - Free Report) is off 18% this year and has lost 10.5% past month.
Thanks to sky-high U.S. inflation and a hawkish Fed, the greenback has been steady this year, with 9.4% year-to-date, 4.9% monthly and 15% yearly gains in
Invesco DB US Dollar Index Bullish Fund ( UUP Quick Quote UUP - Free Report) . As a result, the U.S. dollar index rose to fresh two-decade highs and most emerging economies’ currencies have been falling to multi-year lows against the greenback.
Now, developing or emerging countries must tighten their monetary policies to counter declines in their own currencies. Otherwise, it would raise inflation of EMs and push up the cost of servicing dollar-denominated debt. Dollar appreciation has pushed an emerging currency index down 3.5% this year to an 18-month trough,
Most emerging economies are commodity-rich, especially Latin America. This favored such countries in the initial phase of this year. But as the recession fear took the world markets in its grip, the shine started fading from Latin America too. The copper-reliant Chile's peso gained 8% in the first quarter, only to fall 10% since then, per Reuters.
Dollar strength also tightened EMs’ ability to obtain credit. An emerging market’s financial conditions index from Goldman Sachs is near the tightest since 2008, up some 300 bps this year, per Reuters. No wonder, such an economic backdrop would slow down EMs’ growth considerably. As a result, EM ETFs have fallen massively this year.
Still, there are some EM ETFs that are up at least 4% this year against a 17.4% loss seen in the
SPDR S&P 500 ETF ( SPY Quick Quote SPY - Free Report) . Following are those EM ETFs. However, all these country ETFs gained due to oil strength. Most of these regions like Saudi, Qatar, UAE and Nigeria are oil-exporting and hence gained a lot from a massive oil rally this year. Brent crude ETF (is up 48.2% this year. BNO Quick Quote BNO - Free Report)
There is the only exception Turkey. Borsa Istanbul’s BIST 100 Index hit the highest level this year since data first became available in 1988,
per data from Investing.com, as quoted on al-monitor.com. The Central Bank of Turkey paused its easing cycle in recent times and left the key one-week repo rate steady at 14%. Such a high rate has probably gone in favor for its financial companies. ETFs in Focus Saudi Arabia Franklin FTSE Saudi Arabia ETF (– Up 20.8% YTD FLSA Quick Quote FLSA - Free Report) iShares MSCI Saudi Arabia ETF ( KSA Quick Quote KSA - Free Report) – Up 18.5% YTD Turkey iShares MSCI Turkey ETF (– Up 16.5% TUR Quick Quote TUR - Free Report) Qatar iShares MSCI Qatar ETF (– Up 14.7% QAT Quick Quote QAT - Free Report) UAE iShares MSCI UAE ETF (– Up 8.7% UAE Quick Quote UAE - Free Report) Nigeria Global X MSCI Nigeria ETF (– Up 4.1% NGE Quick Quote NGE - Free Report)