Emerging market exchange traded funds drudged through a dismal year and haven’t found a solid footing so far. While some may be tempted to call a bottom, investors could still experience even more volatility ahead.
The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) has declined 12.5% over the past year while the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) fell 11.8%. [Emerging Markets ETFs Resisting Goat to Hero Theme]
Emerging market equities have underperformed developed markets by as much as 40% since 2011 and show a 30% discount in price-to-earnings, reports Shuli Ren for Barron’s.
While the valuations may look attractive, HSBC and Citi analysts warn against jumping in too quickly.
Fund flows reveal that retail investors are rotating out of emerging markets and into developed country assets. For instance, EEM saw $2.1 billion in outflows so far this year while VWO saw $1.8 billion in redemptions, according to ETF.com. Meahwhile, the Vanguard FTSE Europe ETF (NYSEArca: VGK) is the most popular ETF year-to-date, attracting $1.1 billion in assets. [2014 Will Be a Year of Moderation for Stocks, ETFs]
“While each emerging market has its own idiosyncratic risks, investors have started grouping them as one, and migrated to developed markets funds,” Pablo Goldberg, Head of Emerging Markets Research at HSBC, said in the Barron’s article. “Outflows from EM equity and fixed income funds coincid[ed]with inflows into those dedicated to DM. Given the flows story, portfolio managers might be discouraged to look for value in EM.”
Moreover, investors are becoming more choosey as they shun riskier emerging markets for riskier assets in developed markets.
“What was so strange about last year was that in EM, risk was a losing proposition whilst in the DM space, risk actually delivered positive returns,” Citi strategists Markus Rosgen and Yue Hin Pong said.
Vanguard FTSE Emerging Markets ETF
For more information on developing countries, visit our emerging markets category.
For full disclosure, Tom Lydon’s clients own shares of EEM.