It has been a few months to forget for Turkey, as the once
surging nation has faced a series of widespread protests and
political uncertainty, stemming from issues in the country's
largest city, Istanbul. The main protests began against plans to
develop a small park in the metropolis, but soon spiraled out of
control with the focus being on many citizens' displeasure with
the path of the current Prime Minister, Tayyip Erdogan.
The unrest has also had a devastating impact on the country's
stock market with shares plunging across the board as foreigners
flee the nation. It also hasn't helped that there has been a
general exodus away from emerging markets lately, further adding
to Turkey's woes (see
Turkey ETF Crashes After Istanbul Protests
The real pain lately, however, has been in the currency
market, as the nation's lira has faced incredible selling
pressure. In fact, the currency has plunged by almost double
digits since the start of May against the dollar, easily putting
it into the bottom echelon of currencies against the greenback
over the past two months.
Many are also growing extremely worried about the ability of
the nation's central bank to continue to defend the lira against
outside shocks. The central bank sold $1.3 billion on Wednesday
to boost the lira's prospects, following a $2.25 billion sale of
dollars on Monday. Now, according to Reuters, there have been
sales of roughly $6.2 billion this year, suggesting that Turkey
has already spend a decent sum on the defense of their currency
Is the Turkey ETF in Trouble?
This is pretty troubling as some estimate that the country's
total net reserves are below $40 billion now, not exactly a huge
level considering how much has been spent this week alone. Plus,
according to Reuters
, 'HSBC strategist Murat Toprak estimated that Turkey could
afford to spend about $10-$13 billion of its reserves in defense
of the currency,' meaning that the nation is fast approaching its
spending limit on currency stability.
If that wasn't enough,
rating agency Fitch also suggested
that its credit rating could be at risk if the strife across the
nation continues, potentially putting its investment grade level
in jeopardy. Furthermore, bond yields have also been soaring,
with Turkish Two-Year bonds rising through the 9.0% yield level,
the highest in 2013 so far.
Turkey ETF Impact
As you might expect, this trend hasn't exactly been great news
Turkey ETF (
as of late. The fund has plunged by about 20% in the past three
month period, with the bulk of the losses coming in the past
eight weeks alone (see
Winning ETF Strategies for the Second Half of
Furthermore, the ETF is down about 6% in the past five trading
days, compared to a 2.3% gain for SPY and a -0.3% loss for VWO.
So clearly TUR is greatly underperforming not only domestic
markets, but broad emerging market benchmarks lately as well.
It also doesn't help that much of the Turkish ETF is focused
on volatile financial securities, with roughly 45% of the
portfolio going to this sector. This segment will probably be
among the most impacted by the sluggish lira trading, as well as
the general risk off attitude in the nation.
Lastly, it is also worth noting that all of the fund's assets
are focused on lira-denominated stocks. Due to this lack of
dollar denominated exposure, any lira slumps-when repatriated
back to dollars-will hurt the performance of this ETF for U.S.
While some investors may have thought that the worst was over
for the Turkey ETF, this clearly isn't the case. The nation is
having significant trouble even now that the worst of the
protests are over, as foreigners are still pulling capital out of
the nation, preferring safer locations for their investments
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This trend has manifested itself in not only sluggish stock
prices, but a slumping lira as well. The currency is becoming
increasingly tough for the central bank to defend, and more
losses may be likely in the future if the central bank is unable
to put enough cash behind the currency to keep it propped up in
the near term.
Given this, investors might want to avoid the Turkey ETF for
the time being. The fund was once a solid performer, but those
days seem like long ago; investors now have to contend with
currency issues, political worries, and downgrade fears, a trio
that you should probably stay far away from, especially in the
volatile emerging market space.
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ISHARS-EMG MKT (EEM): ETF Research Reports
ISHRS-MSCI TURK (TUR): ETF Research Reports
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