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How To Stick With Emerging Markets If The Dollar Rebounds

May 18, 2016 1:19 pm
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No, it is not a coincidence. The U.S. Dollar Index is down 4.6 percent year-to-date and the MSCI Emerging Markets Index is slightly higher. With the greenback's slide now spanning multiple months, some currency market participants are expecting the dollar to rebound.

If that scenario comes to pass, that does not necessarily mean bad news for all emerging markets and the relevant exchange-traded funds. In fact, the WisdomTree Strong Dollar Emerging Markets Equity Fund (BATS: EMSD) is uniquely positioned to withstand, even thrive, if the dollar rallies again.

While some ETFs have attempted to isolate developed markets companies positioned to benefit from favorable emerging markets growth trends, the WisdomTree Strong Dollar Emerging Markets Equity Fund goes the other way. The ETF follows the WisdomTree Strong Dollar Emerging Markets Equity Index (WTEMSD), a benchmark that includes emerging markets firms that depend on the United States for at least 15 percent of their revenue.

Related Link: U.S. Dollar Index Little Higher Ahead Of Fed Minutes

It’s Not Just What’s Inside…

EMSD's potential to be firm and possibly a winner if the dollar resumes a currency leadership role is as much about what is excluded from the ETF as what it includes.

“By design, WTEMSD avoids the more leveraged sectors (Financials, Telecommunication Services and Utilities) — which are at risk of a stronger U.S. dollar if they have debt denominated in U.S. dollars that is becoming harder to pay back with weakening currencies — as well as commodity sectors (Energy and Materials), which also tend to be most impacted by a rising dollar,” said WisdomTree in a note out Tuesday.

Excluding the aforementioned sectors, particularly, financials, telecom and utilities, means EMSD is significantly less exposed to state-owned enterprises (SOEs) than many traditional emerging markets ETFs.

Related Link: WisdomTree Unveils Big Expansion To Fixed Income ETF Lineup

Conversely, the ETF is exposed to more compelling emerging markets themes, such as the consumer and technology. A look at EMSD's top 10 holdings, which include Samsung (SAMSUNG ELECTRONIC KRW5000 (OTC: SSNLF)), Hyundai Motor (HYUNDAI MOTOR CO KRW5000 (OTC: HYMLF)) and LG Display Co Ltd. (ADR) (NYSE: LPL), indicate many Americans are already consumers of some of the products made by companies in this ETF's lineup.

Nearly 80 percent of EMSD's geographic weight is allocated to Taiwan, South Korea and India, which speaks to the fund's dollar sensitivity. Those countries are net commodities importers, meaning their local equities markets are often pinched when commodities prices rise.

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