It all started so well. Coming into 2019, emerging markets as a region was cheaply valued at multiyear lows, offering a perfect jumping point for a strong and steady recovery rally hinged on the region’s promising growth story.
And rally it did until about mid-April. Some of the largest emerging market ETFs—the iShares Core MSCI Emerging Markets ETF (IEMG), the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets ETF (EEM)—were up 13-14% in the first 3½ months of the year. Their performance was a solid showing, considering the S&P 500 was up about 16% in that time frame, measured here by the SPDR S&P 500 ETF Trust (SPY):
What happened next changed it all: A trade war took hold. First with China, then with Mexico, then back some more with China; months later, we are still watching a trade dispute of global significance unfold. And one that’s taking place as investors fret about a slowing global economy.
China has dealt with a lot this year, from the ongoing trade war with the U.S., to internal battles with Hong Kong, to slowing domestic growth. China is the world’s second-largest economy, it’s also the biggest emerging market, representing at least a third of broad emerging market ETFs such as EEM, IEMG and VWO.
If China hurts, so does the rest of the emerging market space. Year to date, these ETFs have given up much of their earlier-year gains:
It’s not surprising to see that investor demand for exposure to emerging markets all but dried up halfway through the year.
Emerging market ETFs have now seen seven consecutive weeks of outflows totaling $12 billion in redemptions in that period. Some of the bigger funds are still in the black, but barely.
Broad, Cheap Beta At The Top
Leading net inflows year to date are the broadest, cheapest total emerging market equity ETFs, as seen in the table below:
|Ticker||Fund||YTD 2019 Net Flows ($,M)||2019 AUM ($,M)|
|IEMG||iShares Core MSCI Emerging Markets ETF||2,759.84||51,941.15|
|VWO||Vanguard FTSE Emerging Markets ETF||2,303.57||59,442.27|
|SCHE||Schwab Emerging Markets Equity ETF||838.47||5,681.43|
|JHEM||John Hancock Multifactor Emerging Markets ETF||500.41||750.02|
|SPEM||SPDR Portfolio Emerging Markets ETF||483.26||2,439.45|
|EMLC||VanEck Vectors J.P. Morgan EM Local Currency Bond ETF||440.28||5,042.18|
|EEMV||iShares Edge MSCI Min Vol Emerging Markets ETF||363.29||5,340.36|
|VWOB||Vanguard Emerging Markets Government Bond ETF||307.20||1,470.13|
|ESGE||iShares ESG MSCI EM ETF||248.09||658.84|
|DGS||WisdomTree Emerging Markets SmallCap Dividend Fund||242.90||1,521.29|
While those top three funds—IEMG, VWO, SCHE—have China representing a big cut of the portfolio, they are also the cheapest funds in the space, offering investors broad, accessible diversification for a very low cost in a single wrapper.
If you are a long-term, buy-and-hold investor with a broadly diversified asset allocation, chances are one of these funds is part of your mix. So, their assets tend to be sticky.