+ 0.00
+ 0%
+ 0.00
+ 0%
+ 0.00
+ 0%
+ 0.00
+ 0%
+ 0.00
+ 0%

How The Fed Affects Emerging Markets ETFs

August 17, 2016 8:50 am
Share to Linkedin Share to Twitter Share to Facebook Share to Print License More
How The Fed Affects Emerging Markets ETFs

In terms of asset classes, they do not get much different than emerging markets equities and U.S. government debt. At least that is what many investors are led to believe. However, the year-to-date returns of some popular exchange-traded funds tell a different story.

For example, the iShares MSCI Emerging Markets Indx (ETF) (NYSE: EEM) is up 18 percent while the iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSE: TLT) is higher by 16.3 percent. That is not to say emerging markets stocks and longer-dated U.S. government debt are always intimately correlated, but those returns underscore the point that developing world equities benefit from lower U.S. interest rates, too.

The Fed’s Influence

As investors have learned in recent years, even the mere speculation of hawkish action by the Fed can be a drag on emerging markets stocks, and the stronger dollar weighs on commodities, pressuring stocks in commodities-driven developing economies.

Related Link: Piggyback Your Favorite Activist Investors With This ETF

“Emerging market (EM) assets are typically vulnerable to Fed rate hikes. Higher U.S. rates often buoy the U.S. dollar and weigh on commodity prices. The reaction is likely to be muted at the next rate increase. We expect the Fed to raise rates just once this year — likely in December — and to proceed cautiously given the unevenness of the domestic economic recovery, as highlighted by weak retail sales data released last week, and global growth uncertainties,” said BlackRock in a recent note.

While fixed income investors are enjoying the Fed's reluctance to raise rates, pushing assets in bond ETFs to record highs, resurgent emerging markets are also attracting new capital at an impressive clip. Year-to-date, EEM has hauled in $5.87 billion in new assets while TLT has added $795.1 million in new money. Only six new ETFs have added more new assets this year than EEM, the second-largest emerging markets ETF.

Dollar Strength And Emerging Assets

The weaker the dollar remains, the more appealing emerging assets are. Emerging markets governments and some corporations binge borrowed in dollars during the various versions of the Fed's quantitative easing programs. It looked smart as the dollar weakened against a plethora of developed and emerging currencies, but those emerging markets borrowers were caught off guard when the dollar started soaring several years ago.

“The lower for longer outlook for Fed rates extends investors’ reach for yield, and we see it further supporting EMs. It buys time for EMs to implement structural reforms, such as India’s recent tax reform and Indonesia’s renewed push for fiscal reform. This could enable select EMs to be more resilient when the Fed eventually normalizes rates,” added BlackRock.

Do you have ideas for articles/interviews you’d like to see more of on Benzinga? Please email feedback@benzinga.com with your best article ideas. One person will be randomly selected to win a $20 Amazon gift card!

Related Articles

Emerging Markets ETFs: A Rally With Legs

Opportunity Beckons With Emerging Markets ETFs

Which ETF Will Grow The Most By 2025?

Every week, Benzinga conducts a survey to collect sentiment on what traders are most excited about; interested in; or thinking about when they are managing and building their personal portfolios. read more

3 Bearish ETFs To Profit Bullish Counterparts With Elevated Short Interest

It's not just stocks that are made for shorting. Plenty of traders tap exchange-traded funds on the bearish side of things and do so for a variety of reasons. read more