The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the two largest emerging markets exchange traded funds by assets, each suffered steep losses last year so it is not surprising that advisors and investors ran away from developing markets funds.
Some fund managers believe it will be a while before emerging markets stocks recover in earnest. Investors pulled out of riskier emerging markets as data showed growth from China’s economy slowed, commodity prices fell and the Federal Reserve signaled an interest rate hike this year. The China slowdown is fueling the lower commodity prices and lower outlook for other major emerging economies. Moreover, rising borrowing costs, a stronger dollar and rising corporate debt loads, with the International Monetary Fund warning of corporate defaults, are adding to volatility. [Area Emerging Market ETF Investors Must Monitor]
“Investors pulled a record $72.6B, or 8% of AUM, from emerging market funds last year, according to EPFR, well more than the $39B pulled amid the global financial crisis in 2008,” according to a Seeking Alpha blurb.
The data also indicate that emerging markets funds have suffered outflows in 22 of the past 25 weeks. Last year, EEM and VWO lost over $9.4 billion in combined assets. Only one ETF lost more money than EEM and only three, including EEM, so greater outflows than VWO.
Hedge funds are among the professional investors reducing exposure to emerging markets ETFs. For example, Ray Dalio’s Bridgewater Associates, one of the world’s largest hedge funds, trimmed its exposure to emerging markets exchange traded funds during the third quarter.
Developing market equities could seen more pain ahead as the U.S. Federal Reserve readies its first interest rate hike in almost a decade. After years of growth fueled by cheap money and an end to a commodities super-cycle, economists at the Bank of International Settlements warned of negative spillovers with higher borrowing costs, reports Elaine Moore for the Financial Times.
“In the current streak of nine straight weeks of outflows, $12.5B, or 1.7% of AUM has exited. It’s typically taken outflows of more than 4% of AUM over a 10-week stretch to create a strong tactical buy signal for EM,” adds Seeking Alpha.
iShares MSCI Emerging Markets ETF
Tom Lydon’s clients own shares of EEM.
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.