Holders of S&P 500-benchmarked mutual funds and ETFs are like patrons of a fine restaurant who have ordered the wrong menu item. They are looking at the plates of investors in emerging markets and taking note at what they should have been ordering all along — but perhaps they’ll have a chance to order it next time.

There is no surprise: the 10-year trailing annualized return for the S&P 500 as measured by the largest such index fund — the Vanguard 500 Index (VFINX) — is 0.37%, while the same return for a conservative Asia-focused fund like Matthews Asian Growth and Income (MACSX) is 15.44%. If you had invested in Asia over the past 10 years you beat the returns you could have had in the U.S. by 15.07% per year!

Is it any wonder that holders of S&P 500-benchmarked investments have chosen to vote with their feet?

The S&P 500 has risen from 1040 at the end of August to almost 1200 with very shallow pullbacks. For the unprecedented 25th consecutive week we have seen outflows from domestic mutual funds, yet money continues to flow toward our favorite emerging markets.

If you look at the ICI data, over the last week $202 million was withdrawn from domestic equity funds that most often benchmark against the S&P 500, while $2.22 billion was deposited in foreign funds that most often focus on emerging markets. There have been steady inflows into bond funds all along. (For the monthly data of this long trend, interrupted by a financial crisis driven by the West, click here for a PDF document).

So is it too late to buy into our favorite emerging markets, given the huge move off the May lows?

Waiting for a pullback in a secular bull market driven by sound macro fundamentals is a painful thing. It’s often smaller than you think and it often comes from higher levels. For investors that have been bullish on emerging markets all along — as we have been here at Asia Insider — it’s a nice problem to have.

Just to make sure that we are not comparing apples to oranges, Brazil and China have both had dedicated small-cap ETFs for a while — the Market Vectors Brazil Small-Cap ETF (NYSE: BRF), Guggenheim China Small Cap ETF (NYSE: HAO) — while a small-ap ETF on India was only recently introduced, but has still performed well. Russia does not have a dedicated small-cap ETF — this is why we use the large-cap RSX in our comparison — but given the way the ETF industry operates, I am quite sure this will change soon.

While I remain bullish for the long-term on emerging markets, I also remain bearish on developed world markets, and more particularly, U.S. banks. There are “green shoots” that show bank lending has stopped declining quite so aggressively, but that is not the same thing as rising, is it?

This breakdown in relative performance of the Financial SPDR (NYSE: XLF) compared to the S&P 500 was screaming “SELL” all the way back from the fall 2007 — for those who cared to listen.

This is why when the U.S. stock market is approaching its highs for the year on the S&P 500 while the XLF:SPY ratio is making new lows, I feel compelled to mention it and keep following the situation closely. For long-term investors, I would only consider holding financial companies in organically-growing emerging markets.

It is true that we saw a rollover of XLF relative performance at the end of 2009 and we still did not have a big selloff. But we did have a volatile trading range in BRIC markets in the first six months of 2010, which is normal after the huge rise in 2009. Still, on a relative basis the XLF:SPY ratio is near the lowest level in 2010 — something is fishy here.