Blog

Developed Stocks Vs. Emerging

July 22, 2013
Share:

For what feels like an eternity, market pundits have been calling for the “great rotation” from bonds to stocks. A rotation is happening, but elsewhere.

The problem with the bonds-to-stocks rotation is that outside of a couple of head-fakes, borrowing rates have remained stubbornly low.

All the while, investors have indeed been reallocating, but in perhaps a different manner than most had anticipated; namely, out of emerging markets equities and into their developed market counterparts.

The two largest emerging markets ETFs—the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MCSI Emerging Markets ETF (NYSEArca: EEM)—have lost more than $11 billion in assets in 2013.

On the other hand, the Vanguard FTSE Developed Markets ETF (NYSEArca: VEA), the PowerShares QQQ Trust (NasdaqGM: QQQ), the SPDR S&P 500 ETF (NYSEArca: SPY) and the iShares MSCI EAFE ETF (NYSEArca: EFA) have collectively seen more than $13 billion in inflows over the first seven-plus months of the year.

This dichotomy speaks to a shift not just in assets, but also in the global economy.

As our own Matt Hougan recently pointed out, the total market segment of the emerging markets space has been extremely weak in 2013. The iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) that tracks perhaps the most comprehensive emerging markets index—the MSCI Emerging Markets IMI—has fallen more than 9 percent this year.

A combination of monetary tightening measures in China; civil unrest in Turkey and Brazil; and economic restructuring has made the developing world less appealing relative to the developed world­­—regardless of the fiscal challenges facing the latter.

Call it the cleanest-dirty-shirt dynamic.

While it may seem easy to pick apart the logic of transitioning assets to developed equities markets, the fact is that U.S. equities and the iShares MSCI EAFE ETF (NYSEArca: EFA) are both up this year, and even the iShares MSCI EMU ETF (NYSEArca: EZU) is quietly up 3 percent year-to-date, while emerging markets sit well in the red.

Meanwhile, the IMF recently cut its growth forecast for emerging markets—along with the rest of the world—citing, among other things, a negative outlook for exports.

To that end, the inability of emerging markets to grow and maintain exports in a world where nearly all central banks are openly debasing their currencies poses perhaps the biggest obstacle and opportunity for these markets.

On the one hand, so much of the developing world’s returns over the past decade have been fueled by resource and manufacturing exports.

 

ETF.COM CHANNELS

Want to learn more about smart-beta ETFs? Check out our smart-beta guide, essentials library and ETF screener!

ETF DAILY DATA

Small-cap stock ETF 'IWM' took a breather and found itself among the biggest creations Monday, July 27, raking in more than $420 million in one day. Total U.S.-listed ETF assets dropped to $2.111 trillion.

A roster of ETFs including 'IJH' and 'IWM' paced iShares' issuer-leading inflows Monday, July 27. Total U.S.-listed ETF assets dipped to $2.111 trillion.

ETF.COM ANALYST BLOGS

By Paul Britt

Toss and turn about whether to hedge currency risk, but don’t lose sleep over the derivatives themselves.

By Dave Nadig

With the China A-Share market half-broken, ETF investors should be very, very cautious.

By Drew Voros

Price depreciation and continued outflows have made for a tough few years.

By Dave Nadig

Legendary investor trips over how ETFs work.

ETF INDUSTRY PERSPECTIVE

By Invesco PowerShares

A more in-depth look at the smart-beta survey's results.

By Invesco PowerShares

Smart beta appears to be poised for further growth.