Emerging Market ETFs Are Showing Signs of Life

ETF investors once again looking back into emerging market equities after the recent volatility and stronger U.S. dollar dragged on assets across developing countries.

According to EPFR Global data, emerging market stock funds brought in $395 million in net inflows over the week ended May 16 after suffering $1.6 billion in outflows over the prior week, reports Chelsey Dulaney for the Wall Street Journal.

Over the past week, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) the most popular and largest EM-related ETFs on the market attracted $174.4 million in net inflows, according to XTF data.

Investors have been shunning emerging market assets in recent weeks after the resurgence of the dollar since mid-April fueled concerns over the ability of developing countries to repay their dollar-denominated debts, which become more expensive as the U.S. currency strengthens. Furthermore, with yields on benchmark 10-year Treasuries now above 3%, it is now more attractive for investors to pull money from emerging markets and invest in safer U.S. government debt.

Looking Ahead to the Fed

Looking ahead, investors may believe that emerging equities will be capable of handling the ripple effects of a tighter Federal Reserve monetary policy. Richard Turnill, global chief investment strategist at BlackRock, is bullish on emerging-market stocks and sees “room for equity inflows to ramp up in coming months.”

Earnings growth in emerging market indices are expected to expand by more than 20% over the next year, Turnill added. With strong fundamentals and the recent pullback, emerging equities may look relatively cheap on a valuation standpoint. John Lynch, chief investment strategist for LPL Financial, also argued that emerging market stocks will likely benefit from the still-robust economic growth – emerging economies are expected to expand at a 5% rate this year, compared to a 2.4% rate for developed markets.

Furthermore, rising prices on commodities, notably oil, may also bolster profits for many developing countries that export these raw materials.

For more information on the developing economies, visit our emerging markets category.