Despite risks in some of the more volatile regions of the global markets, investors may want to position for further strength in emerging market exchange traded funds.
Technical indicators indicate that positioning in emerging markets has turned more positive, according to a Deutsche Bank Markets Research note.
“ETF inflows, lower borrow rates, and futures trading rich to fair value indicate more positive positioning,” Deutsche Bank analysts said. “The reversal of outflows from EM ETFs signals investors allocating cash into EM. The normalization of EM borrow rates suggests reduced demand for hedging and short covering, also a positive indicator. Futures traded very cheap to fair value after the China-driven sell-off in August and through September expiry. With futures now trading rich, we can infer that demand for long EM exposure has increased.”
Emerging market ETF attracted $1.4 billion in net inflows over the two weeks ended October 16, paring some of the $8 billion in outflows from August 24th to October 2.
ETFs that track developing economies have been among the most unloved ETFs this year. For instance, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) saw $2.6 billion in net outflows year-to-date while the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) saw $6.5 billion in redemptions.
However, the emerging markets may have attracted some bottom-fishers as valuations look much more attractive. VWO shows a 11.75 price-to-earnings ratio and a 1.46 price-to-book. EEM has a 11.17 P/E and a 1.32 P/B. In contrast, the S&P 500 index is trading at a 18.69 P/E and a 2.53 P/B.
On the other hand, ETF investors may have been shifting their attention to more attractive emerging market fund options. For instance, the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV) experienced $1.1 billion in net inflows and iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) saw $3.1 billion in inflows year-to-date.
The rising popularity of IEMG suggests that investors are favoring the cheaper “core” iShares emerging market product over the older option – IEMG has a 0.18% expense ratio, compared to EEM’s 0.69% expense ratio. Additionally, more wary investors may be turning to EEMV as a way track the emerging markets without the steep price swings.
“For asset allocation into EM, we prefer EEMV which takes advantage of recent equity and FX correlations to try to minimize portfolio risk,” Deutsche strategists added.
The low-volatility emerging market ETF helps investors tap into the growth opportunities of the developing economies and helps limit potential swings in a notoriously risky region.
“We think a low volatility approach offers investors with a way to participate in the stronger growth prospects of emerging markets, while trying to reduce their risk profiles,” Todd Rosenbluth, S&P Capital IQ Director of ETF Research, said in a note.
For more information on the developing economies, visit our emerging markets category.
Max Chen contributed to this article
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.