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August 2018

Turkey's tumult puts a spotlight on country ETFs

Country ETFs are essential tools for managing risk in times of stress

What happens when market chaos erupts eight time zones east of Wall Street?

Investors turn to country exchange traded funds.

With Turkey in freefall, the iShares MSCI Turkey ETF (TUR) became an important tool for accessing a crippled market.

The U.S.-listed ETF experienced record trading volume in recent days as investors used the fund to express views on Istanbul-listed stocks and the Turkish lira.

The iShares MSCI Turkey ETF experienced a record $277 million in trading volume on Aug. 10, as the lira plumbed an all-time low versus the U.S. dollar.1 On the following session, Aug. 13, the ETF traded $241 million, the second-biggest tally ever.2

Trading the iShares MSCI Turkey ETF (TUR)

Trading the iShares MSCI Turkey ETF (TUR)

Source: Bloomberg

ETFs provide access to overseas markets and can help facilitate price discovery — the market-clearing price based on supply and demand — when foreign markets are closed. Since closing bell for Istanbul’s main stock exchange is 11:00 a.m. Eastern Time, the iShares MSCI Turkey ETF was the only U.S.-listed ETF that provided pure access to Turkish assets for much of the U.S. trading session.

Trading in the iShares MSCI Turkey ETF was most intense in critical moments before and soon after U.S. trading opened on Aug. 10, a reflection of demand from investors even at a time when individual Turkish stocks were available. That morning, some $30 million in ETF shares changed hands before markets opened in the U.S.; another $78 million in the session’s first 30 minutes. Together, this period accounted for more than one-third of the day’s record volume.3

A sharp drop in the lira was brought on by a confluence of concerns about debt loads of Turkish corporations, runaway inflation, and a tit-for-tat trade row with the U.S. Global markets have remained volatile as worries spread that a prolonged lira slump could pressure creditor banks to Turkish companies and that broad risk aversion may trigger selling of emerging-market assets.

Even so, trading has been efficient and orderly in the iShares MSCI Turkey ETF despite wild price swings and heavy volumes. The bid-ask spread, or the difference between the highest price prospective buyers will pay for the ETF and the lower price for a prospective seller, remained in line with historic averages.4

Recent trading in the iShares MSCI Turkey ETF is the latest example of a U.S.-listed country ETF becoming a hub for trading activity tied to overseas markets.

  • In May 2018, the iShares MSCI Malaysia ETF (EWM), a U.S.-listed ETF that seeks to track an index of Malaysian stocks, traded more than four times its average volume on a single session.5 This flurry of activity occurred on a day when the local market was closed following a historic election.
  • In May 2017, the iShares MSCI Brazil ETF (EWZ), a U.S.-listed ETF that seeks to track an index of Brazilian stocks, traded the most in its history (and efficiently) following allegations of high-level government corruption.6

The outlook for Turkey remains uncertain but one fact is clear: iShares country ETFs can help unlock investment opportunities in the heat of crisis.

 

Director
ETF Commentator