Emerging Markets, Funds / ETFs

WisdomTree Launches Strong Dollar Emerging Market ETF

By James Eugene

emerging market etfsWisdomTree has launched three new funds, with the most eye-catching of all three being the WisdomTree Strong Dollar Emerging Markets Equity Fund (EMSD), which will allow investors to gain exposure to emerging market stocks that have the potential to thrive in a strong dollar environment while maintaining some degree of diversity.

Key Features

The EMSD will track the price and yield performance of the WisdomTree Strong Dollar Emerging Markets Equity Index, an index that follows emerging market companies that derive over 15% of their revenue from the United States, thus providing investors with the opportunity to put their money into companies who derive a significant proportion of their revenues from exports to the United States as they are the ones most likely to benefit from an appreciating dollar. The index also has less weight on stocks that react most negatively to an increase in the dollar.

WisdomTree Index

The EMSD will track the WisdomTree Strong Dollar Emeging Markets Equity Index

The sector breakdown of the fund provides some interesting insight into what types of companies the fund will look at. The EMSD is specifically designed circumvent any exposure to commodity-reliant sectors as they are more are more prone to weaken due to a strengthening dollar, as well as having low exposure to sectors that carry a lot more debt, such as utilities, financials and telecommunications. A rise in the dollar will make it more difficult for companies in these sectors to pay back their debt, thus having a negative impact profits.

Information Technology stocks are among the most prominent in the fund, comprising of 36.02%. This is followed by consumer discretionary (24.37%), industrial (17.75%), health care (8.67%) and consumer staples (8.58%). Samsun

In terms of country allocation, Taiwan (36.08%), South Korea (35.97%) and India (9.83%) make up over 80% in the EMSD. Brazil (6.71%) and Mexico (6.1%) follow the aforementioned countries to complete the top 5 country allocations, while Thailand, Malaysia, Philippines, Poland and Chile complete the total allocation.

Year-to-date currency performance of the allocated countries in the EMSD

Year-to-date currency performance of the allocated countries in the EMSD

The selection of countries is interesting as it shows that although all of the ten countries’ currencies have weakened against the dollar, there are large disparities between them. For example, the Brazilian Real has depreciated by almost 45% since the start of the year due to the ongoing problems that the country is currently facing; while the Malaysian Ringgit ranks as one of the worst performing Asian currencies. It’s also worth noting that Taiwan, South Korea and India are the largest constituents in the fund and also have the best performing currencies (out of the ten).

The fund charges an expense ratio of 0.58 percent.

Jeremy Schwartz, WisdomTree Director of Research, recently said that “there is anticipation that the rate increase will make the dollar even stronger,” and also that the company “tried to create a new strategy that will give protection against a foreign-exchange loss”.

The dollar has recently risen due to the Federal Reserve providing more signals that they may raise interest rates before the end of the year. This caused a handful of emerging currencies to fall against the dollar. This new ETF will allow investors to still retain some degree of exposure in emerging markets while benefit from the growth of companies that thrive in a strong dollar environment.

About James Eugene

Interested in many (maybe too many) things. Football, Politics and Emerging & Frontier Markets, to name a few. Twitter: @James_Eugene

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