This article was originally published on ETFTrends.com.
The inaugural game of the 2018 NFL season begins tonight with the Atlanta Falcons facing the Philadelphia Eagles. Every team has a go-to play like the quick slant to obtain that swift, short yardage gain to establish or maintain forward momentum and in the playing field of exchange-traded funds, U.S. ETFs have mimicked that call.
According to a report from State Street Global Investors, 80% of all equity inflows were into domestic-oriented funds and $19.7 billion were deposited into U.S.-listed equity ETFs in August alone. The numbers reflect that in this extended bull market run, investors still favor U.S. ETFs as their go-to call in the game of profit-seeking.
"On a regional basis, the US continues to be the “quick slant” play call, outperforming developed and emerging markets by 5.5% and 6.2% in August, respectively," said Matthew Bartolini, Head of SPDR Americas Research State Street Global Advisor. "These sizeable gains have pushed both regions’ outperformance into the double digits on the year."
In the meantime, trade wars have been akin to a cornerback putting the defensive lockdown on the forward momentum of emerging markets ETFs. In addition, rising interest rates and a stronger dollar have also batted away any attempts at gains--this month, emerging markets will be watching the Federal Reserve closely with respect to monetary policy or even more specifically, what the central bank decides to do with interest rates.
The U.S. dollar has been gaining strength, but its ramifications have been felt globally, particularly with respect to emerging-market assets. A rising dollar could mean financial instability for emerging market nations trying to pay outstanding U.S. debt obligations with local currencies. Rising interest rates may also discourage foreign investment into emerging market nations in favor of assets based in the U.S.
Today, the iShares MSCI Emerging Markets ETF (EEM) is down 0.20%, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) declined 0.32% and the iShares Core MSCI Emerging Markets ETF (IEMG) lost 0.23%.
EEM, VWO and IEMG are all down from a year-to-date performance standpoint based on Yahoo! Finance performance numbers. EEM has lost 4.17%, VWO is down 3.63% and IEMG is in the red 4.13%, but savvy investors could see the opportunity in the dip given the cheaper valuations as well as their current market cycles relative to the U.S. capital markets’ late cycle.
Until then, investors are keen to juke out emerging markets in favor of the U.S. ETFs.
"A stronger US dollar, protectionist trade policies and a Cleveland Browns-like handling of the Brexit negotiations have forced investors to side step developed ex-US and emerging markets like Bo Jackson juking a defender in the open field," said Bartolini.
Nonetheless, if emerging markets can effectively deflect the geopolitical noise and investors can focus on fundamentals, it could be opportunities in the international space that will take the helm as the capital markets in the U.S. delve deeper into their late cycle. Like the NFL, it will be a long season for emerging markets with U.S. ETFs cited as the early favorite to come out on top come Super Bowl time in February 2019.
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