In a month marked by flat U.S. markets, with thin and narrow trading, exchange traded fund investors sought out areas of higher return, targeting emerging market assets over August.
Among the most popular ETF trades, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the two largest emerging market-related ETFs by assets, were the number one and two picks over August, attracting almost $2.2 billion and $1.7 billion in net inflows, respectively, according to ETF.com.
EEM tries to reflect the performance of the benchmark MSCI Emerging Markets Index while VWO tracks the benchmark FTSE Emerging Markets All Cap China A transition Index.
There are two major differences between the two emerging market options. First off, MSCI considers South Korea an emerging country while FTSE designates the Asian economy as developed. Consequently, EEM includes a 14.9% tilt toward South Korea while VWO excludes the country. Secondly, the FTSE is currently transitioning toward China A-shares exposure, which will ultimately raise its Chinese equity exposure, while MSCI has so far refrained from mainland A-share inclusion.
Additionally, among the top 10 most popular ETFs by asset inflows for the past month, the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) added $1.2 billion in new assets.
The newer “core” IEMG has a cheaper 0.16% expense ratio, compared to EEM’s 0.69% expense ratio. IEMG covers the IMI version of the MSCI Emerging Markets index, so it will include a broader 99% of the investable emerging market, compared to EEM’s 85%. Consequently, IEMG includes a greater tilt toward small- and mid-cap emerging market stocks.
Meanwhile, investors continued to pile into S&P 500 ETFs, with the Vanguard 500 Index (NYSEArca: VOO) attracting $1.7 billion in net inflows, SPDR S&P 500 ETF (NYSEArca: SPY) bringing in $1.2 billion and iShares Core S&P 500 ETF (NYSEArca: IVV) seeing $890 million in inflows. Th PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech heavy Nasdaq-100 Index, also added $950 million.
While the S&P 500 ended flat for the month of August, the rising inflows into the related ETFs suggests that investors don’t see a top in U.S. stocks anytime soon, or participants may find little else to invest in as the U.S. economy keeps plugging along.[related_stories]
Among more targeted picks, the Industrial Select Sector SPDR (NYSEArca: XLI) stood out with $850 million in net inflows over August.
On the fixed-income side, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) brought in close to $1.4 billion in net inflows as investors continued to search for higher yielding assets in a low yield environment. LQD comes with a 2.85% 30-day SEC yield, compared to the 1.57% yields on 10-year Treasury notes.
On the other hand, international developed market stocks were among the most shunned assets of August. The WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) experienced $1.1 billion in net outflows, WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) saw $550 million in outflows, iShares MSCI EMU ETF (NYSEArca: EZU) lost $540 million, Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF) shrunk by $480 million, iShares MSCI EAFE ETF (NYSEArca: EFA) saw $460 in outflows and Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU) shrunk by $400 million.
The currency-hedged strategy has fallen out of favor as a weakening dollar or strengthening foreign currencies weighed on the ETFs. However, the U.S. dollar has appreciated over the past week as traders anticipated action out of the Federal Reserve, following Fed Chairwomen Janet Yellen’s speech at Jackson Hole, Wyoming.
SEE MORE: The “3 C’s” Driving Emerging Markets
After seeing robust inflows, the SPDR Gold Shares (NYSEArca: GLD) is giving back some of its recent gains, with $610 million in outflows over August. Gold has experienced a robust rebound this year, but speculation of a Fed interest rate hike diminishes the attractiveness of a hard asset that provides no yield.
Additionally, investors pulled $430 million from the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), which selects stocks based on variances and correlations along with other risk factors. This suggests that investors are growing less weary of stock market turns, and along with recent inflows into the equity-related ETFs, market participants may be growing more risk-on.
For more information on the developing economies, visit our emerging markets category.
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.