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Emerging Market ETFs in Focus on High Outflows

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Per a latest report by the Institute of International Finance (IIF), investors have started pulling out cash from emerging markets, in the biggest slump in portfolio flows since President Donald Trump’s election in late 2016.

The surge in bond yields is giving rise to fears of inflation rising further, as a result of which the Fed might need to raise interest rates at a faster pace. Interest rate fears have caused a sell-off in markets across the globe and investors seem to be reallocating their portfolios to reflect the changing circumstances.

Into the Headlines

Asian countries have been on the receiving end of the reversal, as they witnessed the biggest outflows among the nations covered in IIF’s study. Per a Business Insider article, citing IIF’s study, South Korea, Indonesia and Thailand suffered the most, while investor sentiment still remained positive in regard to Indian investments.

IIF said, “The countries that we track have registered nearly $US4 billion in outflows since flows turned negative on January 30. In line with market performance, most of that — some $3.4 billion — has been outflows from stocks,”  adding, “While Korea, Indonesia and Thailand registered sharp outflows, investors’ appetite for Indian stocks and bonds remained relatively solid.”

Although Trump’s election victory was a negative for emerging market investment enthusiasts, owing to his protectionist stance and pro-growth domestic policies, the general sentiment, with regard to emerging market investments, was positive in 2017. Foreign investors invested around $235 billion in emerging market stocks and bonds in 2017 compared with $152 billion in 2016.

What Lies Ahead?

Lately, foreign investors have been shying away from high-risk emerging-market investments, as the global equity sell-off deepens. Per a Reuters article, citing a statement by Claudio Irigoyen of Bank of America Merrill Lynch, “Asia will follow in sympathy of what they saw in New York because the trigger of the selloff is a New York event.”

The U.S. market sell-off seems to be owing to a correction in overvalued equities. The strong economic data in the United States has prompted investors to rethink their allocations. “While we remain generally optimistic on EM flows this year, downside risks should not be understated,” per a Bloomberg article, citing IIF analysts’ statement. “A sustained global equity market sell-off would clearly be one such downside risk,” the article added.

Let us now discuss a few ETFs focused on providing exposure to the emerging market space (see all Asia-Pacific Emerging ETFs here).

iShares Core MSCI Emerging Markets ETF (IEMG - Free Report)

This fund provides exposure to emerging market equities.

It has AUM of $47.7 billion and charges a fee of 14 basis points a year. From a geographical perspective, it has 28.7% exposure to China, 14.6% to South Korea and 12.1% to Taiwan (as of Feb 2, 2018). Technology, Financials and Consumer Discretionary are the top three sectors of the fund, with 25.0%, 22.1% and 10.6% allocation, respectively (as of Feb 2, 2018). Tencent Holdings, Taiwan Semiconductor Manufacturing and Alibaba Group Holding are the top three holdings of the fund, with 5.0%, 3.3% and 3.3% allocation, respectively (as of Feb 2, 2018). The fund has returned 28.0% in a year. IEMG has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Now let us discuss a few country-specific ETFs focused on providing exposure to the IIF study.

iShares MSCI South Korea Capped ETF (EWY - Free Report)

This fund is the most popular in the space offering exposure to South Korean equities (read: ETFs in Focus on Weak South Korea GDP Growth).

It has AUM of $4.2 billion and charges 62 basis points in fees per year. From a sector look, Information Technology, Financials and Consumer Discretionary take the top three spots, with a 35.0%, 15.0% and 12.4% allocation, respectively (as of Feb 2, 2018). Samsung Electronics Ltd, Sk Hynix Inc and Posco are the top three stocks with 19.1%, 4.8%, and 3.2% allocation, respectively (as of Feb 2, 2018). The fund has returned 25.6% in a year. EWY has a Zacks ETF Rank #2 (Buy), with a Medium risk outlook.

iShares MSCI Indonesia ETF (EIDO - Free Report)

This fund is appropriate for investors looking to gain exposure to companies based in Indonesia. Thus, it offers a pure play on Indonesia.

It has AUM of $574.1 million and charges a fee of 62 basis points a year. From a sector look, Financials, Consumer Discretionary and Consumer Staples are the top three allocations of the fund, with 36.0%, 13.4% and 11.5% exposure, respectively (as of Feb 2, 2018). From an individual holdings perspective, Bank Central Asia, Bank Rakyat Indonesia (Persero) and Telekomunikasi Indonesia are the top three holdings of the fund, with 11.7%, 10.3% and 10.0% allocation, respectively (as of Feb 2, 2018). The fund has returned 15.9% in a year. EIDO has a Zacks ETF Rank #2, with a High risk outlook.

iShares MSCI Thailand Capped ETF (THD - Free Report)

This fund offers exposure to companies based in the country and is an appropriate bet for investors bullish on Thailand.

It has AUM of $427.6 million and charges a fee of 62 basis points a year. From a sector look, Financials, Energy and Industrials take the top three spots, with 21.3%, 16.83% and 11.26% allocation, respectively (as of Feb 2, 2018). From an individual holdings perspective, the fund has high exposure to PTT, CP All and Airports of Thailand, with 10.2%, 7.6% and 5.8% allocation, respectively (as of Feb 2, 2018). The fund has returned 28.2% in a year. THD has a Zacks ETF Rank #2, with a Medium risk outlook.

iShares MSCI India ETF (INDA - Free Report)    

This fund provides exposure to large and mid-sized Indian equities (read: India ETFs in Focus on Union Budget Release).

It has AUM of $5.6 billion and charges a fee of 68 basis points a year. Financials, Computer-Software and Consumer Discretionary are the top three sectors of the fund, with 23.4%, 14.2% and 12.3% allocation, respectively (as of Feb 2, 2018). Housing Development Finance Co, Reliance Industries Ltd and Infosys Ltd are the top three holdings of the fund, with 9.5%, 7.7% and 6.6% allocation, respectively (as of Feb 2, 2018). The fund has returned 20.1% in a year. INDA has a Zacks ETF Rank #1 (Strong Buy), with a Medium risk outlook.

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