ETF Investors Warm up to Emerging Markets

After underperforming the developed economies for years, emerging markets are roaring back, and exchange traded fund investors have taken notice.

The iShares MSCI Emerging Markets ETF (NYSEArca: EEM) was the third most popular ETF over the past month, attracting almost $1.3 billion in net inflows, according to Meanwhile, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) add $190.5 million.

Emerging market stocks are gaining traction as the initial volatility at the start of the year dissipates and investors turned more risk-on. Over the past three months, EEM surged 16.1% and VWO jumped 16.5%.

“We continue to see flow moving out of developed markets and into emerging markets,” Stacey Gilbert of Susquehanna told CNBC.

ETFs that track Japanese and European markets have been bleeding assets over the past month. For instance, the iShares MSCI Japan ETF (NYSEArca: EWJ) saw almost $1.1 billion in outflows, WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) experienced $657.8 million in redemptions and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) lost $951.4 million in assets.

Japanese equities have weakened in light of the strengthening yen currency and its negative effect on Japan’s large export industry. Additionally, the stronger euro and yen currencies also weighed on the currency-hedged ETFs, which short the developed currencies. Year-to-date, EWJ dropped 5.0%, DXJ declined 15.5% and HEDJ fell 4.5%.

S&P Investment Advisory’s Erin Gibbs attributed the greater interest in the emerging markets to an improved outlook on China but warned of weakness in other areas like Latin America and Africa.

“We really see this as a China play,” Gibbs told CNBC. “I think there’s a lot of concerns with other areas of emerging markets.”