Market Overview

How Traders Are Treating The Turkey ETF

How Traders Are Treating The Turkey ETF

The iShares MSCI Turkey ETF (NASDAQ: TUR) jumped 11.27 percent on more than five times the average daily volume Tuesday. While that sounds impressive, the lone U.S.-listed exchange traded fund dedicated to Turkish stocks is still down nearly 19 percent over the past week.

Investors are apt to pin the woes of Turkish stocks on the weak lira, a currency that Turkey and its central bank are proving inept at defending. That is bad news for TUR, which is not a currency hedged ETF. Entering Tuesday, the Turkish lira was not just the worst-performing emerging markets currency in 2018: its year-to-date loss exceeded what's found in the downtrodden cryptocurrency universe.

What Happened

Traders are deploying a variety of tools, including TUR and credit default swaps on Turkish debt, to establish bearish positions on the country's assets.

“As concerns about the Turkish economy continue to mount, particularly around borrowing in USD terms, investors have scrambled for protection via hedging tools,” Markit said in a Tuesday note.

“Those same tools, CDS contracts on the sovereign debt as well as short positions in the country's equity market, are also being used by investors to gain short exposure to the country. The borrowing in dollar terms, by corporates as well as the government, have put pressure on the currency, which has traded down nearly 50 percent relative to the dollar in 2018.”

Why It's Important

TUR holds 62 stocks, over a quarter of which hail from Turkey's bludgeoned financial services sector. Earlier this week, several of TUR's marquee bank holdings notched double-digit one-day declines. Data indicate traders are increasingly bearish on TUR.

“The Turkish equity market is also under pressure, with the iShares MSCI Turkey ETF hitting the lowest level since March of 2009,” according to Markit. “The short position in the ETF has posted a new YTD high in shares terms, 4.2 million shares, having increased 21 percent in the last week. The increasing shares short has been largely offset by the decline in market value.”

TUR has actually seen inflows this month, but that could be a symptom of traders borrowing the ETF's components to reflect bearish positioning. Turkish stocks represent less than 1 percent of the MSCI Emerging Markets Index, meaning traders wanting to short Turkish equities should turn to TUR over diversified emerging markets funds.

What's Next

Several of the most shorted Turkish stocks are among TUR's holdings.

“Short demand in the equity market has been relatively constant in dollar terms amid the sell-off, which has resulted from a significant increase in shares only partially offsetting the declining market value. Equity shorts have largely maintained a position of $1 billion short balances in 2018, 10 percent of which is accounted for by the ETF,” according to Markit.

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