Investors Pour Money Into Emerging Market ETFs

Emerging market exchange-traded funds are bringing in more assets than any other ETF type, a reversal after last year’s decline and following more than a decade of bumping along the bottom. 

Two emerging market ETFs—one stock and one bond—took in the most money among all funds between Jan. 12 and Jan. 18. The iShares Core MSCI Emerging Markets ETF (IEMG), which tracks a stock index, added $1.5 billion and the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) added $1.35 billion, according to ETF.com data. IEMG has returned 18% over the past three months and EMB added 14%, both topping the SPDR S&P 500 ETF Trust (SPY)’s 8.9% gain. 

While how high they climb is anyone’s guess, for now a falling dollar, along with surging demand for commodities that some emerging market nations export to other countries, mean the winds are at their backs. Investors burned by 2022’s market downturns and concerned about a potential U.S. recession are pouring money into the ETFs. 

“Investors are looking for alternatives after the miserable performance of U.S. stocks and bonds in 2022 in a rising interest rate environment,” former trader and ETF.com columnist Andrew Hecht said. 

The dollar has dropped while emerging market ETFs have surged, as measured by the 7.8% decline in the Invesco DB U.S. Dollar Index Bullish Fund (UUP) over the past three months. The weaker dollar helps U.S. investors whose emerging market stocks are priced in overseas currencies, ETF.com analyst Sumit Roy said. 

“When those currencies appreciate versus the greenback, it adds to the returns for U.S. investors,” he noted, adding that, “a weaker dollar eases the financial strains on foreign issuers of dollar-denominated debt and makes imports of key commodities like food and energy cheaper, dampening inflation.” 

The largest emerging market ETF, the $73.8 billion Vanguard  FTSE Emerging Markets ETF (VWO), has risen 17% in the past three months and added $1.93 billion in flows.  

China’s economic reopening, which came after the country loosened unbending COVID-19 restrictions late last year, has also fueled gains in emerging market ETFs, Roy added.  

“Emerging markets have also benefited from the reopening of China—the largest emerging market—and investors’ bias toward value stocks in the current market environment,” he explained. “Their stocks are historically cheap, much cheaper than their U.S. counterparts.” 

Contact Ron Day at [email protected]