Emerging markets equities and the related exchange traded funds are among the best-performing assets in the world this year, but that does not mean the trade is crowded. Actually, data suggest otherwise.
Although ETFs, such as the Vanguard FTSE Emerging Markets ETF (NYSEArca:VWO) are packing on assets at a furious pace, U.S. investors remain under-allocated to emerging markets stocks.
“While they increased allocation to emerging markets by nearly $52 billion in the first quarter of 2017, U.S.-domiciled active managers still have just 5 percent of assets under management allocated to emerging market equities, data from research firm eVestment shows,” reports Reuters.
VWO and the iShares MSCI Emerging Markets ETF (NYSEArca:EEM), two of the largest emerging markets ETFs, have added $5.9 billion and $1.6 billion, respectively in new assets. VWO, the largest emerging markets ETF by assets, has seen its year-to-date inflows tally surpassed by just seven other ETFs.
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One of those seven is the iShares Core MSCI Emerging Markets ETF (NYSEArca:IEMG), the low cost alternative to EEM. IEMG has added $11.1 billion in new assets this year, a total exceeded by just two other ETFs. IEMG is the top asset gatherer among US-listed emerging markets ETFs.
In recent 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.
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IEMG was the most popular ETF of the first quarter, bringing in $6.6 billion in net inflows so far this year, according to XTF data. Investors may be looking at this cheap Emerging Markets option as a way to gain access to emerging markets where valuations are much lower than the loftier prices in U.S. markets.
“By being so underweight, American investors have missed big gains since emerging market stocks pulled out of a five-year bear market in early 2016. Since then, MSCI’s emerging markets index has surged nearly 48 percent, handily outpacing the S&P 500’s 30-percent gain in the same period,” according to Reuters. “Such caution also reflects emerging markets’ long-term volatility. Over the past 18 months of outperformance, emerging markets investors have had to stomach about 35 percent more volatility, Reuters data shows.”
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