Emerging markets equities and exchange traded funds were among the asset classes seen as highly vulnerable to Donald Trump winning November’s U.S. presidential election. It appears that investors are dealing with the notion of “President Trump” and are putting money to work with ETFs tracking developing economies.
The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) are among the well-known emerging markets ETFs that reside near 52-week highs. VWO and EEM are the two largest emerging markets ETFs by assets.
“More than $7 billion has poured into exchange-traded funds tracking emerging market stocks and bonds this year through Feb. 19, according to Bloomberg data. That runs counter to the six weeks after Trump’s election victory, when investors yanked $2 billion from the funds on concerns about his promises to reshape America’s trade agreements. Clearly those fears have receded,” reports Bloomberg.
Investors have added $1.46 billion in new money to VWO on a year-to-date basis. The iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) is this year’s top asset-gathering ETF, having added $3.9 billion in new capital as of Feb. 16. That is about 50% more than the second-place ETF.
IEMG is the low-cost alternative to EEM but interest in the former, which is now home to nearly $23.5 billion in assets under management, indicates there is plenty of support for the ETF among advisors and institutional investors.
In the past couple of years, investors have increasingly turned to cheaper options to gain long-term exposure to various market segments.
Nevertheless, EEM is still a relevant investment as its vast liquidity and tight bid/ask spreads attract large institutional traders whom care more about executing large bets quickly than the long-term cost of holding the fund.
IEMG “has grown by nearly $4 billion, or around 20 percent, this year, the most of any U.S.-listed ETF, according to Bloomberg data. The biggest emerging-market ETF, Vanguard’s FTSE Emerging Markets ETF, symbol VWO, has seen roughly half the inflows, though its expense ratio is slightly higher than IEMG’s,” according to Bloomberg.
The rising dollar is potentially problematic for emerging stocks, but there are ways to handle that. For example, investors may also turn to currency-hedged EM strategies like the Deutsche X-trackers MSCI Emerging Markets Hedged Equity Fund (NYSEArca: DBEM), which targets the emerging markets but includes currency swaps to mitigate the negative effects of a stronger USD or depreciating emerging currencies
Emerging market assets have already struggled and may be past their lowest point. The EM segment could slowly improve from here with strengthening current account balances, rising commodity prices and better fundamentals.