ETF Expert

Since the U.S. dollar is experiencing an intermediate-term downtrend, one that may certainly last another 6-9 months, one is likely to profit from emerging market ETF exposure. In particular, country ETFs like Brazil (EWZ) and Russia (RSX) have benefited enormously from strength in their respective currencies — the “real” and the “ruble.”

To continue industrializing, growing and exporting, however, these relative newcomers on the world economic scene cannot afford to see their currencies climb unabated. With so much riding on their exports, Brazil and Russia require some leveling off on the “real” and the “ruble.” Otherwise, fewer countries will be able to afford to import the goods and resources.

Nevertheless, emerging markets in the BRIC (Brazil, Russia, India and China) may be capable of surviving worldwide jockeying for currency positioning. It is the Frontier Market ETFs like Turkey (TUR), Vietnam (VNM) and Africa (AFK) that have the most to gain AND the most to lose.

Right now, the U.S. dollar carry trade has a fairly straight-forward effect on frontier market ETFs. Dollar down… TUR and VNM up. Dollar up… TUR and VNM down.

Look no further than the dollar devaluation on 11/16 and then… the dollar gains on the following day. Indeed, with the PowerShares Bullish Fund (UUP) surging on 11/17, TUR and VNM were two of the hardest hit ETFs on the trading books.

Unfortunately, there will come a point in time where the dollar carry trade won’t play a role in frontier market investing. The reason? Frontier regions are unlikely to succeed in exporting anything if their respective currencies strengthen too much against the U.S. dollar. Indeed, there’ll come a time when a falling dollar will hurt, not help, frontier market investing.

In contrast, countries like China and Brazil have growing middle classes. Domestic consumption is on the rise. And their “fortunes” are not forever tied to exports alone. It follows that the currency volatility is unlikely to stifle emerging market investing altogether.

But on the frontier? If the dollar gets too weak… or if the yuan remains this weak… frontier ETFs may struggle. Similarly, if the dollar strengthens dramatically, the carry trade will unwind, and all of the risk investing that’s gone towards the frontier will be liquidated.

On Vietnam (VNM) and Turkey (TUR)… it’s best to stay on your toes. In fact, you my want to consider how these investments, like the recent weakness in small-cap stocks, failed to hit 52-week highs the way that Vanguard Emerging Markets (VWO) did hit 52-week highs.

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

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