Market Overview

Kazakhstan Currency Devaluation Has Unexpected ETF Impact


China and Vietnam take that. The global currency devaluation “competition” has a new entrant and it is taking things rather seriously: Kazakhstan.

The central Asian nation decided to let its currency, the tenge, float freely, a move that prompted a 23 percent plunge to a record low against the U.S. dollar. The move follows other widely followed currency devaluations by China and Vietnam.

While Kazakhstan does not occupy a place on the international economic stage anywhere close to being on par with China and, this is not a slight, the country probably does not hold the investment cache of Vietnam, the tenge devaluation is proving problematic for some U.S.-listed exchange traded funds.

For now, the Global X Central Asia & Mongolia Index ETF (NYSE: AZIA) is getting a pass because the fund has not traded today. AZIA had a 23.4 percent weight to Kazakh stocks at the end of the second quarter, making the country the ETF's second-largest geographic weight and making the fund home to the largest Kazakhstan exposure of any ETF.

The tenge devaluation is being felt elsewhere in the ETF complex as well. For example, the Guggenheim Frontier Markets ETF (NYSE: FRN) is off 1.1 percent at this writing and trading near its lowest levels since early in the second quarter of 2009. It would not be fair to blame all of FRN's recent struggles on Kazakhstan, but the ETF has a nearly 5 percent weight to the country, making Kazakhstan the fund's ninth-largest country weight.

The iShares MSCI Frontier 100 ETF (NYSE: FM) is off 1.4 percent at time of writing. FM has a 2.7 percent weight to Kazakhstan, making the country the ETF's 11th-largest geographic weight. Throw in Vietnam, and at least 6.1 percent of FM's country weight has recently engaged in currency devaluation. FM also hit a 52-week low earlier today.

Coupled with currency devaluations, FM and FRN have other problems, namely slumping oil prices. FM allocates a combined 38.6 percent of its weight to OPEC members Kuwait and Nigeria while those countries combine for almost 30 percent of FRN. Then there is the exposure each ETF has to non-OPEC countries that still figure prominently in the production of oil natural gas. Think Pakistan, Oman and Kenya, among others.

Oh, and Kazakhstan just happens to be the largest oil producer in central Asia and its biggest trading partners are Russia and China. The former is the largest non-OPEC oil producer and home to a flailing currency and the latter recently devalued the yuan.


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