Emerging Markets ETFs: Value Or Trap?

September 06, 2018

Sometimes asset flows data offer a glimpse into investor sentiment about certain pockets of the market. This year, however, it’s been hard to tell what ETF investors are thinking about emerging markets.

Consider net creations and redemptions in the five largest total market emerging market equity ETFs year-to-date:


The largest of these funds, the Vanguard FTSE Emerging Markets ETF (VWO) and the competing iShares MSCI Emerging Markets ETF (EEM) have seen combined net outflows of $6.5 billion.

On the flip side, the iShares Core MSCI Emerging Markets ETF (IEMG) has taken in a massive $10.6 billion. The Schwab Emerging Markets Equity ETF (SCHE) and low-volatility EM play, the iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV), are also net gainers.

Lest you think this divergence in demand is all about chasing performance, think again. Year-to-date, these funds have delivered nearly identical results, with the exception of low-volatility EEMV, which is faring better than the rest.



Mixed Sentiment

Perhaps the mixed sentiment is linked to a mixed picture for the region. One of the main appeals of an emerging market equity allocation has long been the potential for outsized growth relative to developed markets. Many say that potential remains a viable long-term theme centered on consumer and demographic trends.

But in the shorter term, investors may find themselves on a white-knuckle ride. And to many, stomaching the downturn may prove too much to bear.

There’s no question that emerging markets have struggled this year. A Bloomberg article recently coined the biggest trouble spots right now as a catchy acronym: “BATS”—that stands for Brazil, Argentina, Turkey and South Africa.

Consider the performance of these countries’ equity markets using single-country market-cap-weighted ETFs as proxies:

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