Emerging Market Funds Saw Heavy Inflows in January | ETF Trends

Economic conditions are improving for emerging markets (EM), and it shows in the latest fund flows for the first month of 2023. Investors are re-establishing their taste for EM assets again as the prospect of lower inflation is on the horizon.

“Emerging market bond and equity funds received heavy inflows in January after a dry patch last year, aided by China’s reopening and softening inflation pressures worldwide,” a Reuters article said.

2022 saw the U.S. dollar reach new highs while interest rates were rising, which created downward price pressure on EM. Last month, EM assets in both stocks and bonds saw inflows, highlighting the overall improvement in demand after last year’s tumultuous environment.

“According to Refinitiv Lipper data, which covers over 33,700 emerging market (EM) funds, EM equity funds received $13.2 billion, and EM bond funds obtained $11.36 billion in January. Both the inflows were the highest in over a year,” the article added.

Trade the Bullishness in EM

Traders looking to catch a wave of momentum can ride the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC). This is especially the case if the market can slough off the prospect of higher interest rates, essentially understanding that in order to get the long-term gain, there must be short-term pain of further rate hikes until inflation is finally under the Fed’s control.

Nonetheless, EDC seeks daily investment results equal to 300% of the daily performance of the MSCI Emerging Markets IndexSM. The fund invests at least 80% of its net assets in financial instruments, such as swap agreements and securities of the index, ETFs that track the index, and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index.

The index is designed to represent the performance of large- and mid-capitalization securities across 26 emerging market countries. Looking at its top holdings, there’s an obvious tilt towards Asia. India and Brazil round out the top five country allocations.

“Even as global growth slows, we believe EM equity valuations have room to improve in 2023, driven by lower inflation, a peaking U.S. dollar, greater clarity around key political events, and structural shifts within the region,” said Josh Rubin, portfolio manager at Thornburg Investment Management.

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