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 ETF.com. 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.”
[related_stories]EEM includes a hefty 23.6% tilt toward China and holds about 70.1% in emerging Asian economies, along with 12.8% Latin America and 9.1% Africa/Middle East.
“I would recommend that investors actually focus specifically on Asia Pacific ex-Japan,” Gibbs added. “We think you get the most bang for your buck by focusing on that one region.”
For example, ETF investors can look at emerging Asia options, including the Global X FTSE ASEAN 40 ETF (NYSEArca: ASEA), SPDR S&P Emerging Asia Pacific ETF (NYSEArca: GMF) and iShares MSCI Emerging Markets Asia ETF (NYSEArca: EEMA).
ASEA leans toward southeast Asian economies, including Singapore 36.8%, Malaysia 26.8%, Indonesia 18.5%, Thailand 13.4% and Philippines 4.5%.
GMF top country weights include China 43.9%, Taiwan 21.0%, India 17.6%, Malaysia 5.4%, Thailand 4.5%, Indonesia 4.1% and Philippines 2.7%.
EEMA also includes Asia Pacific exposure, except the MSCI categorizes South Korea as an emerging economy. Country weights include China 33.9%, South Korea 22.2%, Taiwan 17.3%, India 11.6%, Malaysia 5.1%, Indonesia 3.9%, Thailand 3.1% and Philippines 2.1%.