NEW YORK (ETF Expert) -- Emerging-market exchange-traded funds are pulling back sharply from gains they had achieved in recent months. The countries with the largest drops recently are those most dependent on foreign capital to finance their super-sized deficits.
In essence, speculation that some of the worlds central banks may pare back the printing of money is adversely affecting funds like WisdomTree India Earnings (EPI) and iShares MSCI South Africa (EZA). The broader-based Vanguard Emerging Markets (VWO) is not faring particularly well either.
Similarly, fears that the U.S. Federal Reserve is preparing to slow down its ultra-accommodative easy money policy (aka quantitative easing or QE) is slamming precious metals and miners. Funds including iShares Silver (SLV), ETFS Physical Precious Metals (GLTR) and Market Vectors Gold Miners (GDX) are experiencing the double whammy of tax-loss harvesting and taper tantrum selling. Indeed, more and more investors are beginning to fret that the Fed will reduce its $85 billion per month bond-buying program.
From my vantage point, the shorter-term speculation will fizzle out. The near-term concern that the Fed may curb its enthusiasm for electronic money creation does not alter the longer-term trend of extremely slow growth across the worlds developed economies. Europe, Japan and, yes, the U.S. expansion in developed regions is extraordinarily fragile. It follows that central banks around the globe are unlikely to tighten the reins in a meaningful manner and risk soaring yields that would adversely affect their ability to pay the interest on massive debts.
What does it all mean? It means that cheap money via QE is going to be around for many years to come. It also means that any effort to wind down emergency stimulus will be abandoned at the first sight of recessionary struggles. Keep in mind, in every instance over the last five years where the Federal Reserve attempted to curtail a QE program, they started another. It follows that the investment community will continue viewing stock setbacks as opportunities (e.g., buying the dips), at least until the day when investors lose confidence in central bank stimulus.
My suggestion? Use near-term selloffs to fill gaps in your current allocation with ETFs that thrive on central bank stimulus bounces. The most recent and best example of this phenomenon is the one that occurred when Ben Bernanke's Fed decided not to put the brakes on its $85 billion per month this past September. The market had to contend with a government shutdown, but once investors were able to buy the dips on shutdown concerns, stock assets were off to the races.