Emerging Markets Outflows: Worse Before it Gets Better

February 4th at 7:30am by Tom Lydon

Few if any anecdotes and statistics pertaining to emerging markets exchange traded funds in 2014 are positive. That is particularly true of fund flows data.

As of Jan. 30, “more than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created,” report Lu Wang and Ye Xie for Bloomberg.

That data point jibes with a not often seen, but still very real fact: Investors have pulled $8.5 billion from U.S.-listed ETFs this year. Of the $8.5 billion investors have pulled from U.S.-listed ETFs since the start of 2014, $7.6 billion has come out of equity funds while bond funds are lighter by $247 million. Despite improve price action in gold, commodities have shed $624 million, according to ConvergEx data. [Surprising ETF Outflows]

Last year, five of the 10 worst ETFs in terms of yearly outflows were emerging markets ETFs. Two of those five offenders, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), have bled a combined $8.4 billion this year as of Monday. [Rough January for Emerging Markets Outflows]

Due to the intimate correlation between the performance of emerging markets stocks and flows in and out of funds that hold those equities, some market observers see more pain ahead for ETFs tracking developing world equities.

“Since cumulative inflows into Emering market equity funds reached a peak of $220bn in February last year, $60bn of funds have fled elsewhere,” writes Societe Generale analyst Alain Bokobza, Michael Ide reports for ValueWalk. “Given the exceptionally strong link between EM equity performance and flows, we think it plausible that funds are currently withdrawing double that from EM equity.”

Not surprisingly SocGen said the current account deficit issue that has hampered so many emerging markets will continue to be important, ValueWalk reported. Countries such as the BIITS nations have been plagued by rising external deficits compelling investors daring enough to remain involved with emerging economies to prize those with account surpluses. [Rate Hikes Fail BIITS ETFs]

To be fair to the BIITS countries, Indonesia reported its biggest trade surplus in two years in December. Southeast Asia’s largest economy has posted three consecutive monthly surpluses.

As a result, the Market Vectors Indonesia ETF (NYSEArca: IDX) and the iShares MSCI Indonesia ETF (NYSEArca: EIDO) have easily outpaced the major Brazil, India, Turkey and South Africa ETFs this year.

iShares MSCI Indonesia ETF

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.