By Carl Delfeld of Chartwell ETF and Emerging Market Trends
WisdomTree Dreyfus Emerging Markets Currency ETF (CEW)
Rationale and Overview:
When markets are headed south, a good place to find refuge and profits is in currency markets. Right now higher rates in China as well as across emerging markets is trimming economic growth but strengthening currencies. Currencies are also a good hedge on your emerging markets equity positions.
China’s raising of reserve requirements and rates is an indicator that this is only the first step of the mandarins to rein in overextended financial and real estate markets. Furthermore, other countries in the region are likely to follow suit.
My favorite choice is the WisdomTree Dreyfus Emerging Currency fund (CEW), a basket of eleven emerging market countries. The allocations as of early December were as follows: 36%, China, South Korea, India, Taiwan, 28%, Brazil, Chile and Mexico, 18%, Israel and Turkey, and 9% each for Poland and South Africa.
Catalyst:
Interest rates are on the rise in most emerging markets. Low borrowing rates in US and Japan just encourages investors to borrow in dollars and yen and search for higher yielding options in countries such as emerging markets.
Tip:
Think about coupling CEW with the Dollar bull ETF (UUP). I have both CEW and UUP in my global core/explore portfolio strategy and they are not inconsistent with each other. UUP moves against the euro, yen, pound, krona and Swiss franc.
Risk Factor:
The risk factor is medium to high and I suggest using CEW only in moderation and using a 6-8% trailing stop loss.
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