Investors Lose Interest in Emerging Market BRIC ETFs

After the Fed eased “tapering” fears, emerging market equity exchange traded funds saw renewed risk-on trades. However, investors shouldn’t rush into the developing economies too fast.

Once a hot investment theme, BRIC – Brazil, Russia, India and China – ETFs are losing their appeal as investors’ love affair with the developing markets runs cold.

“Every decade, there’s a theme that captures investors’ imagination — the 1970s was about gold, 1980s was all about Japan and 1990s was about technology companies,” Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, said in a Bloomberg article. “Last decade it was about the BRICs. That theme has basically run its course.”

So far this year, investors have pulled $13.9 billion out of BRIC equity mutual funds, or 27% of total inflows since 2005. [BRIC ETFs Get Hit with Outflows]

Meanwhile, the Guggenheim BRIC ETF (NYSEArca: EEB) and iShares MSCI BRIC ETF (NYSEArca: BKF) both fell 16.4% year-to-date, and the SPDR S&P BRIC 40 ETF (NYSEArca: BIK) dropped 14.8%. After the Fed announcement late Wednesday, the BRICs ETFs gained 3% to 4% Thursday.  [BRIC ETFs Languish with Emerging Markets]

The MSCI BRIC Index declined 12% over the past quarter while BRIC currencies depreciated 4.1% against the U.S. dollar and government bonds dipped an average 0.6%.

A number of factors has contributed to the decline in BRIC markets. For instance, rising inflation, weak economic growth and violent protests weighed on Brazil. Russia’s economy slowed over five straight quarters on lower oil prices. India’s currency depreciated to an all-time low due to a widening current-account deficit. China is experiencing its lowest economic expansion since 1990.

“The problem is that it’s a structural slowdown rather than a cyclical slowdown,” Liza Ermolenko, an emerging-markets economist at Capital Economics, said in the article. “It’s more of a new phase rather than this being a temporary phenomenon.”