Emerging-market exchange traded funds have seen five straight months of inflow from investors, especially into Asian markets, reversing last year’s trend, while European equity funds have seen outflow.
With the U.S. equity markets hitting all-time highs, market analysts consider Asian markets cheap in a world with few bargains. They are encouraged by recent stabilization of the Chinese economy, improving fundamentals throughout Asia, and optimism over the recent elections in India and Indonesia.
In addition, the Federal Reserve’s tapering of its quantitative easing strategy has not resulted in higher Treasury yields, which many fear would mean more expensive borrowing costs for emerging-market countries.
“There is also a lot of excitement over the Shanghai-Hong Kong Stock Connect,” said Richard Peterson, who is the managing director of MarketPsych.com, a behavioral finance consultancy based in New York.
The program is expected to start in October. Global investors will for the first time be able to trade the Shanghai A shares, which are now available only to Chinese investors via the Hong Kong stock exchange. Chinese investors will also be allowed to trade the previously unavailable Hong Kong H shares.
In August, emerging-market equity ETFs, including China funds, received inflow of $4.7 billion, according to BlackRock ETP Research. Inflow was down from the $6.3 billion posted in July, on expectations of rising U.S. interest rates, which could pull investment money out of Asian and back to the U.S. Still, over the past five months emerging-market ETFs have gathered $17.6 billion.
Vanguard Attracts Flow
Vanguard FTSE Emerging Markets ETF (ARCA:VWO), the largest emerging-market ETF tracked by research house XTF, recorded $1.7 billion in inflow over the last three months. The $49 billion VWO is up 8% this year. It has an expense ratio of 0.15% and a yield of 2.47%. The fund has 43% of its assets in emerging Asia and 21% in Latin America.
Subtracting the outflow of the first three months of the year, emerging-market equity’s net inflow of $11.6 billion as of August has surpassed the $10.4 billion of redemptions posted in 2013, said BlackRock. Last year’s net outflow came on the heels of a Chinese banking crisis, an overheated property market, fear of a hard economic landing in China, and regional currency weakness based in anticipation of rising U.S. interest rates.
IShares MSCI Emerging Market ETF (ARCA:EEM), the second largest emerging-market ETF, with $41.9 billion in assets, had net inflow of $2.01 billion the past three months, according to XTF. The fund is up 5% this year. It has an expense ratio of 0.67%.
BLDRS Emerging Markets 50 ADR (NASDAQ:ADRE) is the second best performing ETF in the emerging-market category, up 13% year to date. The fund tracks the performance of about 50 emerging-market American depositary receipts. This ETF charges an expense ratio of 0.3% and had a yield of 3.5%.
“We are seeing in Europe grave concerns about the economic rebound and a lot of political uncertainty in Latin America,” said Andrew Karolyi, faculty director of the Emerging Markets Institute at Cornell University’s Johnson Graduate School of Management. “People withdrawing capital from Europe need to deploy it somewhere, and Asia looks like the least bad option.”
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