Hougan: ETFs Aren’t Ruining EMs
The Financial Times has a thing about exchange-traded funds. I can’t quite figure out why, but for whatever reason, the great newspaper—perhaps my favorite—consistently attacks ETFs.
Net-net it’s a good thing. The FT’s journalists are among the best in the world, and their persistent probing has forced ETF investors to look hard at the structure.
But sometimes they aim … and miss … and the results can lead investors astray. John Authers’ recent column on emerging markets falls into this camp.
Authers’ piece, titled “Emerging Markets Are Badly Served By ETFs,” claims that by allowing investors to buy and sell emerging market ETFs, they have ruined emerging market economies.
“The raw facts are that a remarkable amount of money has been pulled out of EM with indecent haste; and that this was the first emerging market sell-off to be conducted mostly through ETFs,” wrote Authers.
“They have misallocated capital, and helped to create yet another boom and bust cycle for the emerging world when many countries had fixed deep-seated institutional problems. There are better ways to invest in emerging markets than through ETFs,” he added.
Authers’ piece is riddled with confusing and contradictory statistics. For instance, he cites Morgan Stanley data saying that ETFs “account for about $330 billion of the $1.3 trillion in emerging market equities.”
That would be a frightening number, suggesting that ETFs hold about 25 percent of all emerging market stocks.
But hold on a second. Two paragraphs later, Authers cites TrimTabs data saying that “emerging market ETFs suffered redemptions of $4.4 billion (4.8 percent of their assets) last week.”
It’s not clear how $4.4 billion is 4.8 percent of $330 billion.
(Our data suggest U.S. investors have $117 billion invested in emerging market equity ETFs, by the way.)
Worse than the percentage confusion is Morgan Stanley’s $1.3 trillion estimate for the total capitalization of emerging market stocks. MSCI—the world’s leading global index firm—puts the number at $3.7 trillion.
If you use the MSCI number, the $4.4 billion that flew out of emerging market ETFs last week represented about 0.11 percent of the total amount of money invested in emerging markets. That doesn’t sound scary at all. In fact, that sounds fairly conservative for a market that’s in the midst of a panic.
Today the news is full of stories about the collapsing pound. Not so much.
Real-world tracking difference is incredibly important. So why does nobody look at it?
The latest SPIVA scorecard is pretty depressing news for active managers.
Today’s headlines on these quant/active strategies have us scratching our heads.