Turkish lira crash is hurting millennials invested in emerging markets

Jason
Cairnduff/Reuters

The Turkish
lira did not go down on its own when
it plunged to record lows. 

Emerging-market assets from currencies to stocks also sold off as
investors wondered what Turkey’s currency trouble would mean for
other countries. 

One of the most prominent victims of the drop was the Vanguard
FTSE Emerging Markets exchange-traded fund (VWO), a basket of
stocks located in China, South Africa, and other developing
countries. With $90 billion in net assets, it’s a bedrock
emerging-market ETF.

Its top investors include
Betterment and Wealthfront, two of the most popular
robo-advisors that help people get involved in the markets at a
low cost. The two companies use algorithms to construct
portfolios, with VWO a key component. VWO makes up as
much as 15% of some portfolios on Betterment, for example.

The two companies are the fifth and eighth-largest investors in
VWO, according to their most recent regulatory disclosures.
Nearly all of Wealthfront’s clients — 85% — are under 45, and 55%
of Betterment’s customers are millennials (generally placed in
the 18-35 age range), company spokespeople said.

VWO has fallen 3.6% in the past week, dragged by concerns
surrounding Turkish firms’ ability to repay their
dollar-denominated debt. On Monday, $1 cost as much as 7.13 lira,
the highest ever; on January 1, Turkish companies only needed
3.79 lira to repay every dollar they had borrowed. 

VWO’s decline since last week Monday has cost Betterment and
Wealthfront investors $66.4 million, based on the sizes of their
positions in regulatory filings. The Securities and Exchange
Commission requires large investors to disclose their largest
holdings once a quarter, and so these shares could have changed
since the last filings.

Even with this paper loss, many analysts don’t expect Turkey’s
woes to cause significant damage to other emerging markets. For
one, the country-specific
iShares MSCI Turkey ETF crashed 21% last week, versus 3.6%
for VWO. It also helped that Vanguard, which manages VWO, had
composed the ETF of just 0.9% Turkish assets, limiting the losses
for millennial investors.

“There is a conspicuous lack of contagion as Turkey’s afflictions
are uniquely unfortunate among MSCI EM nations and EM is not on
the hook for Turkish FX debt,” Alexander Redman, the head of
Credit Suisse’s global emerging-market equity strategy,
said in a note on Friday. 

Frank Chaparro contributed reporting. 

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