Emerging Market ETFs
If the US$ heads lower, investors will look to other markets for returns. The price of emerging markets ETFs have increased recently. What is your view of these ETFs, eg EMKT? I note your core portfolio does not have any.
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Answer
Hi John,
The $US has already dropped over 12% from its January high which has given emerging markets (EM) a nice tailwind. The correlation between the 2 is strong except during the “Liberation Day” panic:
- Many emerging market countries and companies borrow money in U.S. dollars. When the dollar is weaker, it’s cheaper for them to pay back what they owe.
- When the U.S. dollar is weak, investors often put money into emerging markets to get better returns than they can in more developed/richer countries.
We are $US Dollar bears over the medium/long term but it has become a crowded trade and an upside squeeze wouldn’t surprise which would likely weigh on EMs. We aren’t ruling out taking exposure to the EMs, probably via the large ASX-traded IEM ETF but the risk/reward isn’t appealing at this stage.
