By Dodd Kittsley, CFA, Head of Global ETP Market Trends Research
It’s always a good idea to check in on your portfolio to make sure it’s still giving you the exposure you originally intended. But just like eating an apple a day or flossing every night, most of us tend to ignore this kind of well-intentioned advice. However, something I’m seeing in exchange traded product (ETP) flows and a chart my team put together recently made me think twice about ignoring my portfolio – especially when it comes to my emerging market holdings [see The Cheapest ETF for Every Investment Objective].
Take a look at these side-by-side charts, showing the MSCI Equity Sector Weightings from 1995-2013. One chart tracks sector weightings among emerging markets while one tracks sector weightings among developed markets.
If I asked you to label one chart for emerging markets and one for developed, could you do it? It turns out the one of the left is for EM and the one on the right is for DM. But what’s so surprising to me is that over this 18 year period, how similar the sector weightings between these two types of markets has become.
While investors often associate the emerging world with resources, these days, emerging markets are just as likely to be associated with banks. Financials make up 28% of the MSCI Emerging Markets Index, compared with a 22% combined share of energy and materials and, interestingly, a 21% financials share in developed markets.
My colleagues at the BlackRock Investment Institute recently pointed out that perhaps the label “emerging markets” has begun to outlive its use. Market correlations in EM are at their lowest level since 2006, and the disparity is growing all the time as economies and markets mature at very different speeds [also see 7 Smallest Emerging Market Countries And The ETFs To Play Them].
How is this playing out when it comes to flows of emerging market exchange traded products?
EM ETPs finished 2012 with a record quarter of inflows. Bumper EM equity ETP inflows of $10.9 billion in January turned into outflows in February and March. While it seemed that the tide had swiftly turned on EM stock sentiment, as I pointed out in a recent blog post, the headline outflow numbers actually belied a flurry of activity below the surface. Assets may have been leaving some of the larger EM equity ETFs, but there were still inflows occurring in some of the newer and more granular EM funds.
As the distinction between EM and DM becomes somewhat blurred, and the number of EM funds expand, we’re seeing investors seek more granular exposures to emerging markets. Depending on investment objectives, some investors are choosing to add funds that offer exposure to the less risky EM countries, while others are looking for the stronger sectors within EM [check out the Emerging & Frontier Markets ETFdb Portfolio].
Now, none of this is meant to imply that emerging markets are no longer risky (they are) or that they have surpassed developed markets in terms of investment stability (they have not). And we expect that broad, diversified EM equity funds will always have a place in many investors’ portfolios – particularly those who don’t have very specific views on emerging markets. But the increased interest in individual countries and other narrow EM exposures could be an interesting byproduct of the changing nature of emerging markets themselves – and a good reminder to always check your portfolio to ensure you’re getting the exposure you expect.
Sources: BlackRock, Bloomberg
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In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
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