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New Jersey Pension Fund Slashses Emerging Market ETF Exposure

Zacks Equity Research

The start of the Fed taper and the gradual end of the cheap money era have indeed left deep scars on the emerging market nations. In fact, the outflow of hot money from these developing countries began with the mere talk of the Fed planning to start tapering in mid-2013. This outflow continued until the first quarter of 2014 (read: Emerging Market ETFs See Inflows: 3 ETFs to Pick).

Taking the cue, albeit belated, the New Jersey Pension Fund – the nation’s 12th largest public pension – has reduced its exposure to emerging market ETFs to less than $1.8 billion from a peak of $3.2 billion at end 2012, according to a Bloomberg article.

The pension fund, which had a total exposure of 7.65% in emerging market equities at the end of October last year, has reduced it to 6.56% of its assets as of February.

Below we have highlighted two ETFs which have been on the sell radar for this pension fund. These ETFs have indeed seen their asset base eroding over the past couple of months, and New Jersey’s shift could definitely be a culprit for part of their AUM slides:

Vanguard FTSE Emerging Markets ETF (VWO)

The pension fund has reduced its exposure to VWO, the largest emerging market ETF, to about $109 million from $1.9 billion in 2012.

The fund saw a total of roughly $12 billion outflows since the beginning of 2013 till the first quarter of 2014. Meanwhile, for the same period, VWO has lost nearly 11% as compared to a more than 25% gain for the S&P 500 index.

VWO seeks to passively track the FTSE Emerging Index and has the largest exposure to Chinese stocks. VWO has roughly 20% exposure to China, followed by India and Indonesia.


Asset managers have pulled nearly $12.8 billion from EEM since 2013 till March 31, 2014. The passively managed fund, which tracks the FTSE Emerging Index, has shed 9.3% during the time frame.

Even after the recently reduced exposure, the pension fund still holds roughly $1.3 billion worth of assets in EEM (see: all the Emerging Market ETFs here).

Financials and technology dominate the fund, while country-wise China once again takes the top spot, followed by South Korea and Taiwan.

Apart from EEM and VWO, the pension fund also had exposure to iShares MSCI EAFE ETF (EFA), iShares Core MSCI Emerging Markets ETF (IEMG) and iShares MSCI South Korea Capped ETF (EWY), at the end of February, according to the New Jersey Division of Investment.
Bottom Line

New Jersey Pension Fund’s scaling back comes at a time when emerging market ETFs are again beginning to see huge inflows. In fact, EEM has been the best ETF in terms of inflow since April this year. This is especially true given that the fund has attracted $3.9 billion since April, as per ETF.com. Also, emerging market ETFs have performed quite well over the past two months (read: 3 Emerging Market ETFs Off to a Great Start in 2014).

Positive developments in key emerging markets and subdued recovery in U.S. economic growth seemed to be the major factors for the sharp U turn in asset inflows. China, the second largest economy, recently implemented various stimulus measures to revamp growth in the economy.

Moreover, Indian markets have also been performing very well on the back of improving fundamentals and optimism regarding the elections (read: Will India ETFs Election Fever Continue?)

However, it needs to be seen whether the emerging market nations can continue to keep up their performance for the rest of the year, and if New Jersey’s decision was a wise one or not.

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