ETF Investors Buck Trend to Buy Falling Emerging Markets

Currency volatility has negatively impacted emerging market equity returns year to date. But ETF investors are holding fast

Emma Wall 11.09.2018
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Emma Wall: Hello, and welcome to the Morningstar Series, 'Ask the Expert'. I'm Emma Wall and I'm joined today by Morningstar's Director of ETF Research, Jackie Choy.

Hi, Jackie.

Jackie Choy: Hi, Emma.

Wall: So, it's certainly been a turbulent month for global markets over this summer. What has happened?

Choy: Well, I think if I were to summarise it, I will summarise it with one word 'currency'. So, I think you've seen the market Argentina, all over the news, Turkey, over the news and you saw Argentina brought up their rates at 60% which is pretty high. And also in Asia, you've seen Indonesia rupiah, the Indian rupees all hitting record lows against the greenback. So, we do see quite bit of turbulence in terms of like in currency field.

Wall: How have ETF investors been reacting to this news, because typically negative news means outflows for funds, doesn't it?

Choy: Well, quite usually, but not always, but in terms of like the emerging markets (EM), I would say, year-to-date you saw performance in an active 7% sort of territory. In the month of August around 3% down. It terms of flows, it wasn’t outflows. On the contrary, it was inflows, not big amounts, but still inflows. If you look at the top 10 largest ETFs around the world with EM exposure. In aggregate they – we really saw inflows into these ETFs.

Wall: And what can explain that? Could it be due in part to the type of investor that typically trades ETFs?

Choy: Potentially, because if you look at active funds, they are brought by REIT investors. ETFs, they are brought by institutional investors and retail investors and mostly institutional investors. So, their mindset could be a little bit different in terms of like choosing which asset class or in terms of how they allocate their asset as well.

Wall: And what about closer to home as we sit here in Hong Kong, what can we tell in terms of trends for China and the Asia market?

Choy: Well, in terms with – to China market is a little bit different in terms of flows because if you look at the largest A-Share ETF in Hong Kong, we mostly had outflows and the largest one had outflow as well, the iShare A50 ETF, outflows year-to-date but we saw a little bit inflows in the past two months.

Wall: What's down to that? Why are people buying broad basket ETF for emerging markets, but selling of A shares?

Choy: I think A shares is a little bit different, not just from the fundamental perspective. We also have some market dynamics happening as well. So, I think you know that as well MSCI just included A shares into their EM Index in May for the first stage and August in the second stage. So, that's a little bit different market dynamics happening within A shares.

Wall: Does that mean that A shares make-up more sizable proportion of the EM market? Could people be selling of A shares niche exposures because they now have it through their emerging markets ETF?

Choy: I wouldn't say, there will be a sell-off to buy into the A shares because after all A share, although number of stocks included in the A share, 236 is a quite a big number, but in terms of size, it's still very small, accounting for only 0.75% of the EM Index.

Wall: Jackie, thank you very much.

Choy: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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