Fed Tapering Could Hurt This ETF...And It's Not One You'd Expect


One of this week's most prominent themes has been speculation that the Federal Reserve is either going to wind down or soon end its $85 billion per month asset-buying activities. Not surprisingly, that has not been particularly good news for U.S. stocks and other riskier assets.

Beyond the usual ETF suspects such as mortgage-backed securities, mortgage REIT funds and high beta sector plays that could be harmed by the end of quantitative easing, a surprising candidate for end-of-QE vulnerability has entered the conversation. That ETF is the iShares MSCI Turkey Investable Market Index Fund (NYSE:TUR), one of 2013's emerging markets ETF stars.

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Barclays published a list of investments that could be hit if QE ends and Turkish stocks made that dubious cut.

"Investors who are concerned about the reversal of Fed easing should consider short positions in assets with high elasticities to the Fed and expensive valuations versus history. Turkish equities and US defensives appear vulnerable," according to part of the note posted in Barron's.

That prediction comes just a few weeks after TUR touched a new 52-week high after the Borsa Istanbul National 100 surged to its highest levels in at least 25 years.

Last week, Moody's Investors Service raised Turkey's credit rating by one notch to Baa3 from Ba1. The new rating is investment grade. Then the Japan Credit Rating Agency boosted Turkey to investment grade followed by Canada's international credit rating agency Dominion Bond Rating Service doing the same on Monday.

As for the Barclays prediction, there might be something to it as TUR has fallen since Wednesday when the tapering talk really gained steam, but the ETF is not frothy on a valuation, at least not relative to the broader emerging markets universe. TUR currently has a P/E ratio of 15 and a price-to-book ratio of three. The iShares MSCI Emerging Markets Index Fund (NYSE:EEM) had a P/E of 18 and a price-to-book of three, according to issuer data.

One issue that could through a wrench in the Barclays prediction about Turkey is correlations. As in TUR's correlations to U.S. stocks and EEM is not that intimate. Over the past three years, TUR has a correlation of just 0.54 to the iShares Core S&P 500 ETF (NYSE:IVV) and a 0.66 correlation to EEM. TUR's one-year correlations fall to 0.46 against EEM and just 0.29 against IVV, according to iShares data.

With TUR up about 20 percent in the past 90, the best prescription might be take some profits in the ETF soon, keep a small position and play with the house's money while waiting to see if tapering, if it happens, weight on Turkish stocks.

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