EM ETFs Losing The Inflation Battle

Explaining why so many emerging markets ETFs were darlings in 2010 only to fall on hard times this year can be boiled down to one word: Inflation. From Beijing to Bangalore, Sau Paolo to Shanghai, inflation has been an epidemic for at least 75% of the BRIC quartet (and others) to deal with. Worse yet, policymakers have been fighting a losing battle with blunt instruments that have, thus far, proven ineffective. With that, let's have a look at some of the marquee ETFs that have been most adversely impacted by inflation in 2011. iShares MSCI Brazil Index Fund EWZ: Any Brazil-specific ETF would do, but we opted for the biggest and most liquid. Year-to-date, EWZ is down almost 23%. As we've noted before, some of that decline can be blamed on a heavy allocation to Petrobras PBR. Most of it can be blamed on rising Brazilian inflation that has not wilted even in the face of eight rate hikes in the past 15 months by Brazil's central bank. All that monetary tightening has helped beat inflation, but has led to lower growth forecasts for the largest Latin American economy indicating it's still too early to get involved with EWZ here. WisdomTree India Earnings ETF EPI: If eight ineffective rate hikes in 15 months in Brazil wasn't enough to discourage investors, try the 11 since March 2010 the Reserve Bank of India has tried to no avail. Indian inflation remains stubbornly above 9% and most economists that track the second-fastest growing major economy in the world are betting on another rate hike of 25 basis points when the RBI meets next month. EPI is already down more than 26% year-to-date and until inflation abates in India, the ETF is more value trap than value. iShares MSCI Taiwan Index Fund EWT: Taiwan's ties to China have been the biggest problem plaguing EWT this year, leading to a year-to-date decline of 18.3%. Taiwanese inflation isn't too bad relative to other emerging markets, but Beijing has struggled to cool inflation on the mainland. Now facing the specter of slower economic growth, China is going to have an adverse impact on plenty of emerging markets ETFs and EWT is going to be one of them. iShares MSCI Chile Investable Market Index Fund ECH: Chile's inflation isn't all that bad. In fact, it slowed in July and the central bank held rates steady at its most recent meeting, indicating further monetary tightening is at least on hold, but the tightening regimes in Brazil, China and India have contributed to lower growth forecasts. That has dampened copper prices and demand, making Chile and ECH derivative losers in the emerging markets inflation scenario. ECH is down over 21% year-to-date.