My colleagues at the BlackRock Investment Institute recently pointed out that perhaps the label “emerging markets” has begun to outlive its use. Market correlations in EM are at their lowest level since 2006, and the disparity is growing all the time as economies and markets mature at very different speeds.
How is this playing out when it comes to flows of emerging market exchange traded products?
EM ETPs finished 2012 with a record quarter of inflows. Bumper EM equity ETP inflows of $10.9 billion in January turned into outflows in February and March. While it seemed that the tide had swiftly turned on EM stock sentiment, as I pointed out in a recent blog post, the headline outflow numbers actually belied a flurry of activity below the surface. Assets may have been leaving some of the larger EM equity ETFs, but there were still inflows occurring in some of the newer and more granular EM funds.
As the distinction between EM and DM becomes somewhat blurred, and the number of EM funds expand, we’re seeing investors seek more granular exposures to emerging markets. Depending on investment objectives, some investors are choosing to add funds that offer exposure to the less risky EM countries, while others are looking for the stronger sectors within EM.
Now, none of this is meant to imply that emerging markets are no longer risky (they are) or that they have surpassed developed markets in terms of investment stability (they have not). And we expect that broad, diversified EM equity funds will always have a place in many investors’ portfolios – particularly those who don’t have very specific views on emerging markets. But the increased interest in individual countries and other narrow EM exposures could be an interesting byproduct of the changing nature of emerging markets themselves – and a good reminder to always check your portfolio to ensure you’re getting the exposure you expect.
Dodd Kittsley, CFA, is the Head of Global ETP Market Trends Research for BlackRock.