Earlier this year in the January through early March timeframe, we pointed out enormous inflows in Emerging Markets Equity based funds iShares MSCI Emerging Markets (NYSEArca: EEM) and Vanguard Emerging Markets (NYSEArca: VWO) to the tune of several billion dollars in inflows.
But with the recent hiccup across broad based equity markets, we are starting to see the first evidence of 2012 of some institutional investors cashing out of the EM market segment.
Since the 3rd of May, more than $1 billion has vacated EEM via redemption activity, and the relative underperfomance of the Emerging Markets versus U.S. Equity benchmarks such as the S&P 500 continues. Specifically, EEM is down 17.21% versus the S&P 500 gaining 0.06% in the trailing one year period and YTD EEM is up 6.71% versus the S&P 500 rallying 8.33%. [Why Emerging Market Corporate Bond ETFs are Hot]
We do not see the same level of outflows in VWO (yet), however we believe that this is not an “EEM” event in isolation, but instead of sign of institutions folding their hands in this higher beta segment of the market amid the recent downturn.
EEM is heavy China exposure, which makes up 17.78% of EEM and is the largest country holding, and China has not participated in the upside as much as other areas in the equity markets in 2012.
For investors looking to hedge their EM exposure and/or play the short side of that trade, the largest fund in that category in terms of assets currently is Short MSCI Emerging Markets ProShares (NYSEArca: EUM) which delivers the daily inverse return of the MSCI Emerging Markets Index that both EEM and VWO track.
Still, for higher octane bets, there is Direxion Emerging Markets Bear 3X (NYSEArca: EDZ) which is designed to provide 3 times the daily leveraged inverse exposure to the same MSCI EM Index and ProShares UltraShort MSCI Emerging Markets (NYSEArca: EEV) delivers 2 times the inverse of returns daily.
A related ETF that focuses exclusively on the BRICs (Brazil, Russia, India, and China), is Direxion Daily BRIC Bear 3X (NYSEArca: BRIS) which also may appeal to hedgers and shorts.
Conversely, those who see the recent softness in equities as an opportunity to strategically position for a short term bounce may look to some of the leveraged long products for short term trading opportunities, including ProShares Ultra MSCI Emerging Markets (NYSEArca: EET) which delivers two times the daily returns and Direxion Daily Emerging Markets Bull 3X (NYSEArca: EDC) and Direxion Daily BRIC Bull 3X (NYSEArca: BRIL).
iShares MSCI Emerging Markets
Full disclosure: Tom Lydon’s clients own EEM.