Retail Investors Dumping EM Bond Funds Faster Than Pros

Tens of billions of dollars have been pulled from emerging markets bond and equity funds this year, but the outflows from bond funds haven massive since the start of June. That would be just after tapering of quantitative easing became an everyday topic of discussion.

Year-to-date, a combined $3.28 billion has been pulled from the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), the two largest dollar-denominated ETFs holding developing world debt. Since the start, coinciding with the spike in 10-year Treasury yields, nearly $1.8 billion combined has departed EMB and PCY. [Rising Rates Weigh on Emerging Markets Bond ETFs]

It is mostly retail investors that are waving the white flag on emerging markets bond funds. Since the start of June, retail investors have pulled $18.1 billion from emerging-market bond funds, about one-third of the amount they had put in since the financial crisis, Erin McCarthy reported for the Wall Street Journal, citing EPFR data.

In what may be a sign that retail investors are making an often made mistake of selling near bottoms, institutional investors have liquidated $9.3 billion in emerging markets debt fund exposure, according to the Journal.

Bolstered by a spate of credit ratings upgrades and the Fed’s near-zero interest rate and loose monetary policies, emerging markets bonds became a favored destination for yield-starved investors. EMB has a 30-day SEC yield of 4.99%, nearly 215 basis points higher than the yield on 10-year Treasuries. However, it has been the rising yield on Treasuries that has chased investors out of emerging markets debt. [Emerging Markets Bond ETFs Slide on Rate Jitters]

Sliding currencies in the developing world have also sent investors running out of emerging markets debt funds, but the outflows have not been contained to the dollar-denominated issues. As currencies from Brazil to South Africa to Turkey have been punished, investors have pulled almost $244 million from the Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) since early June.