Call it a reversion or rotation trade or any other fancy Wall Street Jargon, but the fact is emerging markets equities and exchange have recently been thumping their U.S. counterparts.
Sure, it is just five days, but over that time the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) are each up nearly 3% while the S&P 500 is off 2% over the same period. This could be the start of something because institutional money is only incrementally returning to marquee emerging markets ETFs, indicating that larger flows, should they arrive, could boost select ETFs even more. [Not the Time to Sell EM ETFs]
“While we have not seen convincing evidence via ETF flows that institutional portfolio managers are pouring back into Emerging Markets based ETFs (yet), with modest to non-existent weekly flows in important/benchmark ETFs in the space,” said Street One Financial Vice President Paul Weisbruch said in an email to ETF Trends.
Catalysts for the recent emerging markets rally include Brazil, Latin America’s largest economy. The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is up 7% in the past week and with the benefit of Thursday’s 4.7% gain (at this writing), the ETF looks poised to close above its 200-day moving average for the first time since November 2013. [Brazil ETFs Survive S&P Downgrade]
“The generic ‘U.S. is the nicest house in a bad neighborhood’ mantra that was passed around for the past year or two simply isn’t holding this week in equities,” said Weisbruch in a note out Thursday morning.
Weisbruch notes even risk-tolerant traders may be overlooking opportunities with previously unheralded leveraged emerging markets ETFs. The Direxion Daily Russia Bull 3x Shares (NYSEArca: RUSL) is higher by nearly 13% since March 20. [White House the Wrong Place for ETF Advice]
The Direxion Daily Brazil Bull 3x Shares (NYSEArca: BRZU) is up nearly 14% Thursday on volume that is approaching triple the daily average, bringing its five-day gain close to 24%. The Direxion Daily Emerging Markets Bull 3X Shares (NYSEArca: EDC) is up 9% in the past week. The Direxion Daily Brazil 3x Bear Shares (NYSEArca: BRZS) and BRZU are among the largest volume gainers in Direxion’s stable of triple-leveraged ETFs over the past week, according to issuer data.
“This puzzling run, coupled with the fact that year to date EM still has quite a bit of ground to make up in comparison to U.S. equities, not to mention the prolonged and hefty under-performance of EM in the trailing one year and more importantly trailing five year periods, makes us wonder if this is simply a short term ‘end of quarter’ type phenomenon or something that may have legs. As usual, we will just continue to watch the options and ETF fund flows in the space for further confirming evidence of what may be afoot here, and how long any ‘trend’ might last,” said Weisbruch.
Direxion Daily Brazil Bull 3x Shares
Tom Lydon’s clients own shares of EEM.