Exchange traded funds tracking stocks outside the U.S. are among this year’s most prolific asset gatherers with emerging markets funds making significant contributions to that trend. Although emerging markets ETFs are adding assets in a big way, that does not mean this is a hot a trade or that an emerging markets ETF bubble is on the horizon.
The first half of 2017 was kind to emerging markets and the related exchange traded funds. Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), two of the largest emerging markets ETFs, are surging and gathering assets at a rapid rate.
Moreover, the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), the low cost alternative to EEM, is one of this year’s top asset-gathering ETFs as investors have continually looked for low-fee options when embracing ex-US equities.
“Dedicated emerging market equity ETF AUM has roughly doubled over the past year to a record high,” according to Seeking Alpha. “It’s interesting to note the disparity between EM as a % of global market cap in contrast to EM as a % of global GDP, let alone the other stats.”
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ETF investors also threw money into overseas markets where valuations appear cheaper relative to the loftier prices in the U.S. – U.S. markets are trading at forward price-to-earnings of around 18 times, compared to historical averages of 15 times. Year-to-date, IEMG and VWO are among the top 10 ETFs in terms of new assets added. Last month, IEMG added more than $838 million in new assets, making it one of the top asset gatherers in July.
“Strictly speaking you could make an argument that EM is underallocated on some of the stats above. Having said that, the increase in EM ETF AUM has been heroic and whenever you see a surge in assets like that, regardless of over/underallocation, it makes you stop to think,” notes Seeking Alpha.
Earlier this year, IEMG surpassed EEM to become the second-largest emerging markets ETF by assets. Underscoring the point that investors may be under-allocated to emerging markets, just four of the 100 largest ETFs are emerging markets funds.
For more information on the ETF market, visit our ETF performance reports category.
Tom Lydon’s clients own shares of VWO.