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.