Emerging markets have been hogging the limelight lately, courtesy of the $5.1 billion worth of cash inflows over the seven-weeks ended August 17 (per EPFR). Much of the surge in inflows can be attributed to lackluster prospects in developed economies which are leaving investors with little option but to look for growth elsewhere.
Emerging Markets See Rising Inflows
Emerging markets have been attractive for investors willing to take risks. The MSCI Emerging Markets Index was up 12.21% year to date as on September 2, with majority of gains in the last three months.
The emerging markets PMI data at 51.7 for July is also a significant improvement. After April 2013, this is the first time that the figure compared favorably with the PMI data for developed countries. The composite PMI for the four major emerging economies, Brazil, Russia, India and China, was 53.5 in July, indicating the largest expansion since the beginning of 2013.
As per Bloomberg, stocks of emerging markets are headed toward a 13-month high, buoyed by the strengthening of currencies. The MSCI Emerging Markets Currency Index increased for the third consecutive day on September 5. As expectations for a Fed rate hike this year declined, US dollar’s rally petered out, leading to a rebound in EM currencies.Two of the largest global investors, Pimco and BlackRock, have also announced a positive outlook for the emerging markets.
Developed Markets Lose Appeal
While the emerging markets have their own appeal, it is not the only reason for the capital inflows. Political & monetary policy uncertainty, negative interest rates and rising terror attacks have also acted as deterrents to investors in developed economies.
The biggest surprise in the last few months was the results regarding the Brexit vote. Although UK’s economy fared relatively well in the second quarter of 2016, the period post Brexit in the time-frame was small. As per Markit, a survey of the first two months of the third quarter show a composite PMI of 50.3, rebounding from the 53.2 recorded in August. Moreover, economic expansion is expected to be slower at 0.1% as compared to 0.6% in the second quarter. The uncertainties prevent large scale investment in such markets.
Recently, the August jobs report for the U.S. lagged expectations as unemployment remained at 4.9% for the third consecutive month. The release has deferred chances of a rate hike until December, further encouraging investments in emerging markets.
Meanwhile, in Japan, growth opportunities and inflation remain low. Despite the government’s repeated efforts, the central banks inflation target of 2% is pretty high. The GDP of the economy grew at 0.2% for the second quarter, much below expectations, while the consumer price index dropped for the fifth consecutive month by 0.5% in July.
Let’s take a look at some ETFs that provide diversified exposure to surging emerging market equities.
ETFs in Focus
There are a number of ETFs focused on emerging markets, with a few confined to particular countries. However, we have selected a few funds that have balanced exposure to a number of emerging markets.
Vanguard FTSE Emerging Markets ETF ((VWO - Free Report) )
It is the largest emerging market fund with $42.65 billion worth assets under management and a broad-based exposure to developing economies. While the fund is an attractive investment choice for the short as well as long term, it is generally preferred by long-term investors. The fund has 18.36% of the weight in its top 10 holdings, which are primarily in Asia, and an expense ratio of 0.15%. Year to date (as of September 2) the fund has provided a return of 17.46%.
iShares MSCI Emerging Markets ETF ((EEM - Free Report) )
This fund is one of the most popular and oldest funds with $31.10 billion worth assets under management. While the fund is well-balanced and is equally preferred in the short as well as long term, it is heavier on the pocket than the Vanguard EM ETF that is linked to the same index with an expense ratio of 0.69%. However, this fund has an active options market unlike Vanguard. The fund’s total weight in its top 10 holdings is 21.97%. It has returned 17.13% year to date (as of September 2).
iShares MSCI Emerging Markets Minimum Volatility ETF ((EEMV - Free Report) )
This fund primarily comprises stocks of fast growing economies that have exhibited low volatility when compared to the broader market. It has $4.43 billion worth of assets under management with a total weight of 13.94% in its top 10 holdings and a net expense ratio of 0.25%. Year to date (as on September 2), the fund has provided a return of 12.5%.
WisdomTree Emerging Markets High Dividend Fund ((DEM - Free Report) )
This fund, with $1.58 billion worth assets under management, provides investors with an exposure to stocks yielding high dividends in emerging markets. The fund has an expense ratio of 0.63% and a total weight of 26.59% in its top 10 holdings. Year to date (as on September 2), the fund has returned 21.68%.
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