Chartwell ETF Pick of the Week

By Carl Delfeld of Chartwell ETF

WisdomTree Dreyfus Emerging Market Currency (CEW)

Rationale and Overview:

This brand new emerging market currency ETF offers investors the opportunity to gain access to emerging market currencies such as Brazil, Chile, China, the Czech Republic, Hungary, India, Israel, Malaysia, Mexico, Poland, Russia, Singapore, South Africa, South Korea, Taiwan, Turkey, and Thailand.

Diversification into these emerging market currencies has the potential of helping your global portfolio in a number of areas, principally, higher yields, stronger economic growth leading to chances for appreciation, and exposure to non-correlated assets that will likely move opposite or contrary to equities and other asset classes. 

Emerging market equities react to factors independent of those factors that drive currency returns, often contributing to significantly higher volatility. Over the last 10 years, an equally weighted basket of emerging currencies had an annualized volatility of 6.9%, while an equally weighted basket of emerging market stocks from the same countries had a volatility of 25.2%.

Emerging economies often offer higher yields to compensate investors for these risks. The chart below uses global one-month deposit rates to present a range of yield opportunities available to U.S. investors in certain emerging and developed markets. The bar labeled “Emerging Basket” shows an average of the emerging market currencies shown. As of March 31, 2009, the average rate on the Emerging Basket was 3.6 percentage points higher than deposit rates on the euro and 4.2 percentage points higher than similar short-term rates in the U.S.

Catalyst: Emerging market equities have had a good run and the time is right to lighten up a bit by including some currency exposure. Investors are also looking for higher income and plays on a weaker US dollar.

Tip: Keep CEW as one your currency plays along with the Canadian (FXC) and Australian (FXA) dollar.

Risk Factor:
The risk factor is medium and I suggest an 8-10% trailing stop loss.

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