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As it is global stocks are feeling the pinch of escalating trade tensions between the United States and China, and now the collapse in Turkish lira has amplified the concerns. This is especially true as Turkish lira is in a free-fall territory, nosediving as much as 11% against the dollar in early trading today after plummeting more than 20% on Friday.
With the latest slide, the lira is down around 45% against the dollar since the start of the year and has hit its lowest level since 2001 (read: Top & Flop ETF Areas of Q2).
What Happened?
The slump came on the back of worries about President Tayyip Erdogan's influence over monetary policy and a worsening U.S. relationship. Turkish economy is suffering a myriad woes, including double-digit inflation, inadequate currency reserves and one of the largest current-account deficits in emerging markets. Persistent concerns over economic stability and the Turkish government's lack of action to tackle the problems plaguing its economy has taken a toll on its currency.
In particular, Erdogan’s preference to keep interest rates low even though inflation is more than three times the central bank's target has foiled economic conditions. The crisis intensified after U.S. sanctions over a detained American pastor and now Trump’s doubling down import tariffs on steel and aluminum metals has made the situation worse (read: Low-Risk ETFs Taking Off on Rising Tariff Threats).
The breakdown of Turkish lira has made it harder for Turkish companies to pay back loans they have taken in the U.S. currency. If the troubles continue, many economists have warned that Turkey could slip into a recession and the debt crisis would require a bailout from the International Monetary Fund.
Market Impact
The contagion has been spreading across the global market with other emerging currencies bearing the brunt of the lira’s downward spiral. The South African rand hit a low level not seen since mid-2016, the Russian roble slumped again and the Indian rupee slid to an all-time trough. Investors are also fearing that the country’s financial crisis could hit the European markets as well.
The events have led to risk-off trading with lower risk securities, including precious metals and bonds, being in vogue. A few ETFs were severely impacted by the plunging lira while a few look to offer stability or even profits. Below are six ETFs that are especially volatile in the wake of the Turkey crisis:
The Turkey ETF was the worst performer on Friday, losing 14.5% and saw its worst week since 2008 shedding 20.6%. The fund tracks the MSCI Turkey Investable Market Index and holds 62 stocks with none accounting for more than 7.7% of assets. The product has AUM of $299.4 million and charges 62 bps in fees per year from investors.
Gold is often viewed as a store of value and a hedge against market turmoil. The product tracking this bullion like GLD could be an interesting pick amid market turbulence. The fund tracks the price of gold bullion measured in U.S. dollars. It is the ultra-popular gold ETF with AUM of $30.7 billion and expense ratio of 0.40%. However, it has lost 0.04% in the last trading session (read: Gold in Longest 4-Year Losing Streak: Go Short with ETFs).
The U.S. government bonds tracking the long end of the yield curve often carry a safe haven status. The flight-to-safety on Turkey predicament pushed these bonds higher over the past week. As such, the ultra-popular long-term Treasury ETF – TLT – was up 0.7% in the last session. It tracks the ICE U.S. Treasury 20+ Year Bond Index and has AUM of over $7.5 billion. Expense ratio comes in at 0.15%. Holding 32 securities in its basket, the fund focuses on the top credit rating bonds, with average maturity of 25.62 years and effective duration of 17.44 years (see: all the Government Bond ETFs here).
The VIX is often known as the fear index as it surges when investors are skittish about the market’s current direction. Obviously, this is the case right now and the ETN tracking this benchmark has gained in the last trading session. VXX is up 4.9% and is a very liquid choice for traders seeking to make a bet on fear levels in the market. The note focuses on the S&P 500 VIX Short-Term Futures Index and has amassed $869.1 million in AUM. It charges 89 bps in fees per year. However, investors should note that volatility products have been terrible performers over the medium and long terms due to a contangoed market and a steep roll cost.
Invesco CurrencyShares Japanese Yen Trust (FXY - Free Report)
Yen is considered a safe-haven currency in times of uncertainty. Concerns about the crisis-hit Turkey spreading to European banks sent investors scurrying to safe havens including the U.S. dollar, Swiss franc and Japanese yen. Investors could tap this via FXY, which appears a great way to play a future rise in the yen relative to the U.S. dollar. It tracks the movement of the yen relative to the U.S. dollar. The fund charges 40 bps a year in fees and has accumulated $125.1 million in its asset base. It has added 0.2% on Friday (read: BoJ Mulling Over Policy Change: ETFs in Focus).
For investors seeking to make an outright bet against the European stocks, an inverse ETF could be the way to go. EPV offers two times (200%) the inverse (opposite) of the daily performance of the FTSE Developed Europe All Cap Index. The ETF has gained nearly 4% on Friday and has AUM of $19.8 million. It charges 95 bps in annual fees. While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesaw markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as, weeks or months) due to their compounding effect.
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6 ETFs in Focus as Turkey Crisis Worsens
As it is global stocks are feeling the pinch of escalating trade tensions between the United States and China, and now the collapse in Turkish lira has amplified the concerns. This is especially true as Turkish lira is in a free-fall territory, nosediving as much as 11% against the dollar in early trading today after plummeting more than 20% on Friday.
With the latest slide, the lira is down around 45% against the dollar since the start of the year and has hit its lowest level since 2001 (read: Top & Flop ETF Areas of Q2).
What Happened?
The slump came on the back of worries about President Tayyip Erdogan's influence over monetary policy and a worsening U.S. relationship. Turkish economy is suffering a myriad woes, including double-digit inflation, inadequate currency reserves and one of the largest current-account deficits in emerging markets. Persistent concerns over economic stability and the Turkish government's lack of action to tackle the problems plaguing its economy has taken a toll on its currency.
In particular, Erdogan’s preference to keep interest rates low even though inflation is more than three times the central bank's target has foiled economic conditions. The crisis intensified after U.S. sanctions over a detained American pastor and now Trump’s doubling down import tariffs on steel and aluminum metals has made the situation worse (read: Low-Risk ETFs Taking Off on Rising Tariff Threats).
The breakdown of Turkish lira has made it harder for Turkish companies to pay back loans they have taken in the U.S. currency. If the troubles continue, many economists have warned that Turkey could slip into a recession and the debt crisis would require a bailout from the International Monetary Fund.
Market Impact
The contagion has been spreading across the global market with other emerging currencies bearing the brunt of the lira’s downward spiral. The South African rand hit a low level not seen since mid-2016, the Russian roble slumped again and the Indian rupee slid to an all-time trough. Investors are also fearing that the country’s financial crisis could hit the European markets as well.
The events have led to risk-off trading with lower risk securities, including precious metals and bonds, being in vogue. A few ETFs were severely impacted by the plunging lira while a few look to offer stability or even profits. Below are six ETFs that are especially volatile in the wake of the Turkey crisis:
iShares MSCI Turkey ETF (TUR - Free Report)
The Turkey ETF was the worst performer on Friday, losing 14.5% and saw its worst week since 2008 shedding 20.6%. The fund tracks the MSCI Turkey Investable Market Index and holds 62 stocks with none accounting for more than 7.7% of assets. The product has AUM of $299.4 million and charges 62 bps in fees per year from investors.
SPDR Gold Trust ETF (GLD - Free Report)
Gold is often viewed as a store of value and a hedge against market turmoil. The product tracking this bullion like GLD could be an interesting pick amid market turbulence. The fund tracks the price of gold bullion measured in U.S. dollars. It is the ultra-popular gold ETF with AUM of $30.7 billion and expense ratio of 0.40%. However, it has lost 0.04% in the last trading session (read: Gold in Longest 4-Year Losing Streak: Go Short with ETFs).
iShares 20+ Year Treasury Bond ETF (TLT - Free Report)
The U.S. government bonds tracking the long end of the yield curve often carry a safe haven status. The flight-to-safety on Turkey predicament pushed these bonds higher over the past week. As such, the ultra-popular long-term Treasury ETF – TLT – was up 0.7% in the last session. It tracks the ICE U.S. Treasury 20+ Year Bond Index and has AUM of over $7.5 billion. Expense ratio comes in at 0.15%. Holding 32 securities in its basket, the fund focuses on the top credit rating bonds, with average maturity of 25.62 years and effective duration of 17.44 years (see: all the Government Bond ETFs here).
iPath S&P 500 VIX Short-Term Futures ETN (VXX - Free Report)
The VIX is often known as the fear index as it surges when investors are skittish about the market’s current direction. Obviously, this is the case right now and the ETN tracking this benchmark has gained in the last trading session. VXX is up 4.9% and is a very liquid choice for traders seeking to make a bet on fear levels in the market. The note focuses on the S&P 500 VIX Short-Term Futures Index and has amassed $869.1 million in AUM. It charges 89 bps in fees per year. However, investors should note that volatility products have been terrible performers over the medium and long terms due to a contangoed market and a steep roll cost.
Invesco CurrencyShares Japanese Yen Trust (FXY - Free Report)
Yen is considered a safe-haven currency in times of uncertainty. Concerns about the crisis-hit Turkey spreading to European banks sent investors scurrying to safe havens including the U.S. dollar, Swiss franc and Japanese yen. Investors could tap this via FXY, which appears a great way to play a future rise in the yen relative to the U.S. dollar. It tracks the movement of the yen relative to the U.S. dollar. The fund charges 40 bps a year in fees and has accumulated $125.1 million in its asset base. It has added 0.2% on Friday (read: BoJ Mulling Over Policy Change: ETFs in Focus).
ProShares UltraShort FTSE Europe (EPV - Free Report)
For investors seeking to make an outright bet against the European stocks, an inverse ETF could be the way to go. EPV offers two times (200%) the inverse (opposite) of the daily performance of the FTSE Developed Europe All Cap Index. The ETF has gained nearly 4% on Friday and has AUM of $19.8 million. It charges 95 bps in annual fees. While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesaw markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as, weeks or months) due to their compounding effect.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>