- Focus on stocks that derive more than 15% of sales from U.S.
- It costs about 4.5% annually to hedge against EM currencies
WisdomTree Investments Inc. is starting an exchange-traded fund that will allow investors to buy emerging-market stocks that may outperform in a strong dollar environment.
The WisdomTree Strong Dollar Emerging Markets Equity ETF began trading on Thursday in New York, offering a basket of stocks that derive more than 15 percent of their revenue from the U.S. Two-thirds of the fund is allocated to investments in Taiwan and South Korea, while the remaining includes holdings in India, Brazil, Mexico and Thailand.
The fund starts at a time when emerging-market currencies have weakened against the dollar as the outlook for higher interest rates in the U.S. and slower growth in China fuel an investor exodus from riskier assets in developing nations. The New York-based ETF provider is targeting traders who want exposure to emerging stocks but are hesitant to invest because of the foreign-exchange risk and the high cost of hedges to protect against the declines.
“A lot of currencies in emerging markets have taken a huge toll already, and there is this anticipation that the rate increase will make the dollar even stronger,” Jeremy Schwartz, WisdomTree Director of Research, said by phone on Thursday. “At a time when it became expensive to hedge emerging-market currencies, we tried to create a new strategy that will give protection against a foreign-exchange loss.”
The fund focuses on information technology and consumer-discretionary stocks and excludes energy and raw-material producers and companies with the most dollar-denominated debt. WisdomTree Investments uses a weighting methodology that incorporates the size of the company and its correlation to the dollar to select the equity allocation in the new ETF.
Buying protective hedges to preserve capital if a currency declines against the dollar also limits the gains generated if it strengthens. It costs about 4.5 percent annually to hedge against emerging-market currencies, about 25 percent more expensive than the average over the last five years, according to data compiled by JPMorgan Chase & Co.
The dollar rose to a two-month high on Wednesday after the Federal Reserve signaled it may still raise interest rates this year after deciding to hold off at a meeting this week. A Bloomberg index of 20 emerging-market currencies slid 0.3 percent on Thursday to hover near a record low.