Emerging market ETFs are hot again! Since the beginning of April, investors have poured in $4.2 billion in iShares MSCI Emerging Markets ETF (EEM), making it the top asset gainer for the period.
Among single-country emerging market ETFs, India ETFs have seen huge investor interest this year, while Indonesia, Philippines and South Africa also saw asset inflows. On the other hand, China funds have remained out of favor this year.
So, what happened? Most emerging market ETFs were battered last year as foreign investors rushed for exits with the start of “taper” talk.
The trend reversed this year with investors returning to emerging markets as they realized that interest rates in the developed world were not going up as earlier feared.
But that’s not the only reason; there have been a number of other positive developments that resulted in investors’ recent enthusiasm in emerging market ETFs. In many cases, politics/election hopes have been a major factor.
Indian stocks and the currency have been euphoric on hopes of a new pro-business, reform-friendly government led by Prime Minister-elect Narendra Modi. Small-Cap India ETF (SCIN) has soared more than 30% in the past 3 months.
Indonesian voters are expecting a win for the opposition party — led by Joko Widodo — who has a reputation for effective governance. Brazilian stocks have risen as the voter support for sitting President Dilma Rousseff has been declining.
Macroeconomic fundamentals also appear to be improving as some of the measures taken to combat inflation and narrow down current a/c deficit have been successful.
Emerging market ETFs are seeing some love now … but you need to heed the big-picture moves when they come.
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