Where Some of That Lost EM Cash is Going

Investors have not been shy about pulling cash from emerging markets exchange traded funds this year.

To be precise, investors pulled $10 billion from equity-based emerging markets ETFs in January, making January 2014 the worst start to a year for ETF flows since 2014, according to BlackRock (NYSE: BLK). [ETFs Shed $10B in January]

That does not mean investors are shying away from all global ETFs and stashing capital that once resided in emerging markets ETFs in U.S. funds. Although some Europe ETFs have disappointed compared to their impressive 2013 returns, many have been superior to emerging markets equivalents in terms of performance and inflows.

“The bright spots for flows in January were in non-US Developed Markets Equity, which gathered $11.2bn as a number of key themes from 2013 continued into the new year,” said BlackRock. “Pan-European Equity brought in $4.0bn aided by the most encouraging January Euro Zone PMI reading since 2011.

The Vanguard FTSE Europe ETF (NYSEArca: VGK) and the iShares MSCI EMU ETF (NYSEArca: EZU) have both lost more than 3% this year, but each is found on the top-10 list ETF asset gatherers. They are not the only Europe ETFs attracting fresh capital.

Coming off a year in which it was the best non-leveraged Europe ETF, the WisdomTree Europe SmallCap Dividend Fund (NYSEArca: DFE) has not only traded modestly higher this year, but has also seen inflows of nearly $320 million.

Consumer discretionary and industrial names “are some of the sectors within small-cap stocks that are the most highly leveraged to changing economic growth prospects. Consumer Discretionary firms can quickly respond to the uptick in consumption of discretionary items as consumers feel better about their future economic prospects. Industrials can increase their capital spending initiatives as they prepare for the increased demand for their outputs from their customer bases,” according to WisdomTree. [WisdomTree: Why European Small-Caps Soared in 2013]

DFE, which is closing in on $1 billion in assets under management, allocates a combined 39.2% of its weight to the U.K. and Sweden. Speaking of the U.K., the iShares MSCI United Kingdom ETF (NYSEArca: EWU) has brought in over $556 million. Other single-country Europe ETFs that have been inflow positive this year include the db X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR), iShares MSCI Spain ETF (NYSEArca: EWP) as well as ETFs tracking Italy, the Netherlands and Sweden, just to name a few. [ETFs for Possible World Cup Winners]