Trump’s Foreign Policy Could Spell Trouble For Emerging Markets ETFs

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March 20, 2017 7:02am NYSE:DEM

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From Zacks: The uncertainty surrounding the implementation of President Trump’s protectionist policy is making emerging market investments a good bet.


Investors are banking on emerging market investments for encouraging returns as they are skeptical about the approval and successful execution of Trump’s protectionist policies (read: 5 Reasons Why Emerging Market ETFs Will March Higher).

Strategists believe that emerging markets are in a really good position to absorb the two projected Fed rate hikes this year, following a 25 bps increase in the March 14-15, 2017 Federal Open Market Committee meeting. Russia has emerged from its longest recession in two decades. Current account deficit for India seems to be declining. Moreover, investors are bullish on the Indian economy owing to a major state election win for Prime Minister Narendra Modi’s party. South Africa and Indonesia are seeing declines in the current account deficit too. Brazil expects to achieve flat to low single digit GDP growth this year and is likely to emerge from its worst recession (read: 4 Emerging Market ETFs Poised to Be Great Buys).

The rate of interest in the emerging market economies is also much higher compared with almost 1% return in the U.S and negative returns in the euro region. Asset managers are currently more concerned with what is going on in these emerging market economies than how they will be impacted by U.S policy decision changes (read: February ETF Asset Report: EM Gains, U.S. Loses).

Alternatively, if the policies are implemented, it will lead to lower imports. People will spend more on domestic products and U.S inflation could see a sharp increase, leading to the possibility of more rate hikes. In such a scenario, developing nation investments could see a decline as they will no longer be in a position to benefit.

Let’s focus on the following ETFs that might be impacted by the current market scenario:

WisdomTree Emerging Markets High Dividend Fund (DEMFree Report)

This fund offers exposure to some of the highest dividend yielding stocks in the emerging market economies. It offers high levels of current income and has a dividend yield of 3.44%.

DEM manages AUM of $1.65 billion and has an expense ratio of 63 bps a year. Taiwan, China, and Russia take the top three spots in terms of geographical exposure with around 55% allocation. The fund returned 7.3% in the year-to-date time frame and 21.5% in the past one year. DEM currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. (read: Emerging Market & Gold: Two ETFs Trading with Outsized Volume).

PowerShares FTSE RAFI Emerging Markets Portfolio ETF (PXHFree Report)

This ETF offers exposure to major emerging markets and is a useful tool to implement short-term tactical overlays as well.

PXH manages AUM of $790 million and has an expense ratio of 49 bps a year. Brazil, China, and Taiwan take the top three spots in terms of geographical exposure with around 60% allocation. The fund returned 8.8% in the year-to-date time frame and 31.9% in the past one year. DEM currently has a Zacks ETF Rank #3 with a Medium risk outlook.

First Trust Emerging Markets AlphaDEX Fund (FEMFree Report)

This ETF offers exposure to major emerging markets by investing in the Defined Emerging Markets Index.

PXH manages AUM of $181 million and has an expense ratio of 80 bps a year. China, Brazil, and Russia take the top three spots in terms of geographical exposure with around 60% allocation. The fund returned 12% in the year-to-date time frame and 24.8% in the past one year. DEM currently has a Zacks ETF Rank #3 with a Medium risk outlook.

Bottom Line

Although investors are concerned about giving less weight to emerging market investments and not taking enough risk to tap the potential in the portfolio, it should be noted that the failure of President Trump’s protectionist agenda is not certain. In case even parts of his policies on trade are implemented, emerging market investments would take a hit. Hence, we believe, it’s best to remain on the sidelines for now.

The WisdomTree Emerging Markets Eqty Incm Fd (NYSE:DEM) was unchanged in premarket trading Monday. Year-to-date, DEM has gained 10.58%, versus a 6.04% rise in the benchmark S&P 500 index during the same period.

DEM currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #5 of 77 ETFs in the Emerging Markets Equities ETFs category.


This article is brought to you courtesy of Zacks Research.


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