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Mean Reversion Time for Emerging Market ETFs?


Investors have pulled more than $7 billion from the two largest emerging market ETFs in June with the funds suffering year-to-date losses of about 12% to lag U.S. stocks and other developed markets.

Since the end of May, investors have redeemed $5 billion from iShares MSCI Emerging Markets (EEM) and $2.1 billion from Vanguard FTSE Emerging Markets (VWO), according to IndexUniverse data.

Riskier emerging market ETFs outperformed the S&P 500 in 2009 and 2010 when markets recovered after the credit crisis.

However, the funds are way behind the U.S. blue-chip index so far this year. SPDR S&P 500 ETF (SPY) is up about 14%.

Overall, U.S.-listed ETFs have lost about $17 billion of assets under management over the past 30 days, Nicholas Colas, chief market strategist at ConvergEx Group, said in a note Friday. “The biggest bullet thus far has been at the top of the risk pyramid, with emerging markets funds losing $10.4 billion,” he wrote.

“Emerging markets equity ETFs have redeemed a whopping $7.4 billion (6% of assets) in the past month,” TrimTabs Asset Management said in a report Friday. “The heavy outflows are not surprising. Flows generally follow performance, and the average emerging markets equity fund plunged 11.9% in price in the past month.”

A stronger dollar and rising interest rates have been headwinds for developing market equities.

However, there are some encouraging signs this week that emerging market ETFs could start making up some lost ground against U.S. stocks.

For example, EEM is on track for a weekly gain of 4% while SPY is up 1.3%. [Anecdotal Evidence of a Near-Term Emerging Markets Bounce]

The chart below shows the relative performance of the emerging market ETF versus the S&P 500 with this week’s bounce.

Full disclosure: Tom Lydon’s clients own SPY and EEM.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.