Emerging Markets, Treasury ETFs In Vogue

May 30, 2014

ETF investors piled into emerging market equities in May, looking for outsized returns in the region amid a prevailing perception that growth in developed markets—particularly in the U.S.—is slowing down.

At ETF.com, we compile asset flows regularly, and while end-of-month data will not be fully compiled until June 1, a preliminary look at flows through the 10 biggest ETFs in the market today shows that demand for international equities, particularly emerging markets, was widespread this month.

The iShares MSCI Emerging Markets ETF (EEM | B-99), for example, was the most popular of the 10 biggest funds in May, attracting a net of $880 million. Competing Vanguard FTSE Emerging Markets ETF (VWO | C-99)—a portfolio that excludes exposure to South Korea—raked in $153 million in the period. Investors poured more than $365 million into the smaller, but quickly growing, iShares Core MSCI Emerging Markets ETF (IEMG | B-98) in the month.

Demand for non-U.S. equities isn't all that surprising considering that U.S. Treasury yields have been dropping consistently year-to-date, and in May hit multimonth lows—10-Year Treasury yields slipped below 2.50 percent this month. Demand for the safety of U.S. government-backed debt has come as the U.S. stock market cooled down following gains upward of 30 percent last year.

In fact, in the month of May, investors poured more than $5.26 billion into the iShares 7-10 Year Treasury Bond ETF (IEF | A-51) alone. IEF is not among the 10 biggest ETFs in the market, but flows into this fund offer a good glimpse into the renewed appetite for U.S. debt. So far this year, the fund has seen net creations of more than $6 billion.

In the emerging market space, in many countries like India, Indonesia, Thailand and even Brazil, domestic growth and consumption is still on the rise despite global economic uncertainties. What was one of the most shunned asset classes last year is now one of the hottest investment ideas this spring.

May 2014 Flows Through Biggest ETFs
As Of
Fund Ticker 5-29-2014 ($)
iShares MSCI Emerging Markets EEM 880.97
PowerShares QQQ QQQ 755.62
iShares MSCI EAFE EFA 288.05
Vanguard FTSE Emerging Markets VWO 153.48
Vanguard Total Stock Market VTI 131.57
iShares Russell 1000 Growth IWF 78.82
SPDR Gold GLD -101.89
iShares Core S&P 500 IVV -931.72
SPDR S&P 500 SPY -1,967.31
iShares Russell 2000 IWM -4,007.84

The iShares Russell 2000 ETF (IWM | A-83) bled $4 billion in assets this month. The 9th-biggest ETF in the market today has now faced sizable net redemption for two-consecutive months. In April, the fund bled more than $800 million, putting year-to-date net redemptions at $3.5 billion so far.

Small-cap equities are generally believed to be more closely linked to domestic themes, making the exodus from a fund like IWM that much more indicative of how investors feel about prospects for U.S. domestic growth. If nothing else, the U.S. economy showed signs of contraction in the first quarter, according to the latest Commerce Department GDP figure, which dipped into negative territory on an annualized basis.

Since the beginning of the year, IWM slipped 2.14 percent. By contrast, the S&P 500 continues to inch higher, albeit slowly, but demand for large-cap U.S. equities was equally muted in May.

The SPDR S&P 500 (SPY | A-97) and the iShares Core S&P 500 ETF (IVV | A-97) have outflows of $1.9 billion and $931 million, respectively, this month.


Chart courtesy of StockCharts.com

Finally, gold remained an underdog play for the second-consecutive month, as evidenced by flows out of the SPDR Gold Trust (GLD | A-100). In May, the fund saw outflows of $102 million, putting its year-to-date net redemptions at $464 million, according to our data.


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