Historically, emerging markets stocks and ETFs are among the most volatile in the world, but that volatility is decreasing in a big way for investors.
At least that is the case for the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest ETF tracking developing world equities.
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, VWO has seen inflows of $8 billion, ranking it among this year’s top 10 asset-gathering ETFs.
“Expected price swings in the Vanguard FTSE Emerging Markets exchange-traded fund, the biggest of its kind with about $62 billion in assets, have fallen to an unprecedented 10.1 percent compared with a five-year average of 18.6 percent. That follows a 26 percent gain for the ETF this year as investors poured $8 billion into the fund,” reports Sid Verma for Bloomberg.
VWO is one of the least expensive emerging markets ETF with an annual fee of 0.14%, or $14 on a $10,000 investment, making it less expensive than 90% of competing funds, according to Vanguard data.
The weaker dollar has been helping emerging markets assets this year and many bond traders believe the Federal Reserve will not raise interest rates next month and it is possible the Fed will not do so again this year.
Although emerging markets exchange traded funds are among this year’s most prolific asset gatherers in the U.S., some market observers argue that emerging markets equities are under-owned by big investors and that the asset class has more room to rally.
“Optimism about the outlook for economic growth, reduced concern about political turmoil and a jump in corporate profits are underpinning emerging-market assets this year, even as policy makers from Europe to the U.S. signal plans to pull back on stimulus,” according to Bloomberg. “Developing-economy stocks have climbed to a six-year high and valuations are at levels last seen in January 2010, indicating traders aren’t concerned about the impact of higher interest rates.”
FTSE Russell, VWO’s index provider, does not classify South Korea as an emerging market, explaining a significant difference between this ETF and funds tracking the MSCI Emerging Markets Index. That also makes VWO’s declining volatility all the more surprising because South Korea is usually one of the most docile emerging markets.
For more information on the ETF market, visit our ETF performance reports category.
Tom Lydon’s clients own shares of VWO.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.