New ETF Offers Access to Diverse Emerging Market Currencies

WisdomTree Dreyfus Emerging Market Currency (CEW)

Rationale and Overview:

This brand new emerging market currency ETF offers investors the opportunity to gain access to emerging market currencies such as Brazil, Chile, China, the Czech Republic, Hungary, India, Israel, Malaysia, Mexico, Poland, Russia, Singapore, South Africa, South Korea, Taiwan, Turkey, and Thailand.

Diversification into these emerging market currencies has the potential of helping your global portfolio in a number of areas, principally, higher yields, stronger economic growth leading to chances for appreciation, and exposure to non-correlated assets that will likely move opposite or contrary to equities and other asset classes.

Emerging market equities react to factors independent of those factors that drive currency returns, often contributing to significantly higher volatility. Over the last 10 years, an equally weighted basket of emerging currencies had an annualized volatility of 6.9%, while an equally weighted basket of emerging market stocks from the same countries had a volatility of 25.2%.

Emerging economies often offer higher yields to compensate investors for these risks. The chart below uses global one-month deposit rates to present a range of yield opportunities available to U.S. investors in certain emerging and developed markets. The bar labeled “Emerging Basket” shows an average of the emerging market currencies shown. As of March 31, 2009, the average rate on the Emerging Basket was 3.6 percentage points higher than deposit rates on the euro and 4.2 percentage points higher than similar short-term rates in the U.S.

Catalyst: Emerging market equities have had a good run and the time is right to lighten up a bit by including some currency exposure. Investors are also looking for higher income and plays on a weaker U.S. dollar.

Tip: Keep CEW as one your currency plays along with the Canadian (FXC) and Australian (FXA) dollar.

Risk Factor:
The risk factor is medium and I suggest an 8-10% trailing stop loss.

Comments

[Alpha&Omega:]

Nice article. How do all of the ETFs you listed pay the money market yields - on a quarterly, daily etc. It would seem daily would be optimal if suddenly taken out of position with the trailing stop or if held for only shorter periods?

Jul 06 10:21 AM

[ETF Grind:]

This ETF has been trading for months.

Jul 06 01:19 PM

[Analyste de...:]

I like that investors can access currency ETFs, and I think they can be excellent opportunistic trend plays when the Market punishes US fixed income & the Dollar.

That said, I wonder what allocation (range) is suggested here:
"Tip: Keep CEW as one your currency plays along with the Canadian (FXC) and Australian (FXA) dollar." Don't know I'd recommend all three of these currency ETFs to the avg investor, simultaneously. (Arguably, CAD & AUD are an either-or complement with CEW, however.)

Beware ALL currency ETFs except UUP if any hint of another deleveraging wave or worsening financial crisis precipitates in Eastern Europe. 'Flight to quality' - into USD$ investments - really hurts these ETFs, caveat emptor.

Jul 08 05:18 PM