(Bloomberg) — Traders in the $325 billion emerging markets exchange-traded fund industry are shifting money into strategies that focus on more positive aspects in developing countries as China’s economy falters.
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Actively managed ETFs – particularly those with exposure to India’s world-beating growth and Latin American stocks – attracted nearly half a billion dollars last month, according to data on U.S.-based funds compiled by Bloomberg. At the same time, investors have withdrawn $3.5 billion from passive, China-heavy strategies.
While ETFs are becoming increasingly popular as an easy way to access hard-to-reach corners of the financial markets, investors in passive vehicles are struggling with the drawbacks of a fixed strategy. The shift to active funds is evidence that everyone from small traders to professional asset managers is beginning to realize the extent of Beijing’s efforts to achieve its promised post-Covid growth.
“You don’t want to mindlessly or mindlessly follow an index, do you?” said Donald Calcagni, chief investment officer of Mercer Advisors Investment Management. “It is an opportunity to rethink our allocations in emerging markets and take a more flexible approach to geographical diversification.”
Traders withdrew more than $2 billion in August from the $21.6 billion iShares Emerging Markets ETF, one of the largest U.S.-based ETFs focused on broad developing markets. The fund invests around a third of its capital in China.
It’s a big pullback, particularly as investors pour cash into a similar fund that excludes Chinese assets entirely. According to data compiled by Bloomberg, the iShares MSCI Emerging Markets ex China ETF recorded its 11th consecutive month of inflows in August.
Meanwhile, capital invested in the largest ETF tracking Latin American stocks has increased by half a billion dollars in just three months. And just in the last few weeks, Global X Management has launched new ETFs that specifically invest in stocks in individual countries such as India and Brazil.
Changing demand
If these recent trends continue, they are expected to have a significant impact on emerging markets that have historically been more difficult to access for mainstream investors.
Of the seven U.S.-listed ETFs tracking emerging markets that have attracted at least $1 billion this year, three are actively managed vehicles that put more capital into assets in India and have less China exposure compared to passive peers according to data compiled by Bloomberg on September 7th.
That has paid off for traders, as India’s large middle class and fast-growing economy help support its financial assets. The Mexican stock market, meanwhile, is among the best-performing stock markets in 2023, while Brazilian stocks are rising as policymakers embark on an easing cycle.
“We are finding some opportunities in emerging markets outside of China, with Latin America and Southeast Asia being good examples,” said Daniela Da Costa-Bulthuis, a Rotterdam-based portfolio manager at Robeco Institutional Asset Management. “The so-called nearshoring trend – where companies want to be closer to US consumers – favors countries from these regions and is relevant from a long-term perspective.”
However, greater exposure to these countries can be difficult to achieve with broad, passive ETFs, said Malcolm Dorson, head of emerging markets strategy at Global which still represent only a small portion of the broad benchmarks, he said.
Although active ETFs tracking emerging markets only make up about 4% of the emerging market fund universe, the category brought in more than 40% of new money from June 1 to Sept. 6, according to Bloomberg Intelligence. It’s further evidence that actively managed strategies are coming to the fore in the ETF industry, where active assets for U.S.-listed funds hit a record $444 billion in July, Bloomberg Intelligence data shows .
The Avantis Emerging Markets Equity ETF, for example, has raised more than $1.2 billion this year and has increased its assets by nearly 40% since January, according to data compiled by Bloomberg. The strategy has higher exposure to India, Brazil and Mexico than its passive peers and can adjust its portfolio daily based on liquidity, asset performance and governance issues.
Two other actively managed strategies from Dimensional Fund Advisors LP, called by their tickers DFEM and DFAE, have also attracted a flood of fresh money this year by offering greater exposure to Indian stocks and an underweight allocation to China.
Shares of all three active ETFs are up at least 6% so far this year, far outpacing the less than 2% rise in MSCI Inc.’s emerging market stock index.
“India is the best structural story in the world,” Dorson said. “Not holding India today is basically like not holding China 20 years ago. It’s a long-term commitment and I think people in the country are structurally underinvested.”
What you should see
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The People’s Bank of China is likely to cut its one-year interest rate on medium-term loans again. Traders will also be watching credit, activity and price data for signs that the economy needs further policy support.
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India will release CPI data for August and industrial production figures for July.
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The Bank of Russia is expected to leave key interest rates unchanged at 12% after an emergency hike in August.
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Brazilian inflation data for August will provide clues as to whether policymakers will continue the pace of 50 basis point rate cuts.
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Double-digit monthly inflation pressures are expected in Argentina in August, with investors looking ahead to October’s elections.
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Peru’s central bank is likely to cut its key interest rate from 7.75% to 7.50%, according to Bloomberg Economics.
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