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Pick and Choose EM Exposure with Country-Specific ETFs


When it comes to investing in overseas assets, investors are becoming more finicky with their emerging market exchange traded fund exposure.

For instance, James Daniel of The Advisory Firm dropped two broad emerging market ETFs, WisdomTree Emerging Markets Equity Income Fund (DEM) and iShares MSCI Emerging Markets ETF (EEM) , and replaced the positions with targeted China and India exposure through the iShares China Large-Cap ETF (FXI) and iShares MSCI India ET (INDA) , reports Daisy Maxey for the Wall Street Journal.

Daniel argued that the broad DEM and EEM were “weighed down by underperforming countries.”

The broad ETFs include large tilts toward some of the worst performing areas of the emerging markets. For instance, EEM includes 7.6% in Brazil, 7.6% in South Africa and 4.1% in Russia. DEM holds a hefty 19.6% Russia, along with 10.3% South Africa and 8.3% Brazil.

Daniel is not alone as many ETF investors are fed up with broad emerging ETFs. Year-to-date, EEM has experienced a net $2.1 billion in outflows while DEM has seen $271 million in outflows, according to ETF.com. About $2.8 billion has been pulled out of diversified emerging market ETFs this year through the end of March, according to Morningstar data.

Alternatively, more are focusing on the good parts of the world. In China, the government is actively implementing reforms to shift its export-oriented economic model into more domestic consumption-based growth. Additionally, after India’s elections, Prime Minister Narendra Modi has enacted economic reforms that has made the country the next big area of growth.

“Folks are recognizing that emerging markets are no longer this homogeneous investment, that within emerging markets there are opportunities and there are challenges,” Michael Arone, chief investment strategist at State Street Global Advisors, said in the article.

Consequently, Arone points out that State Street and other providers have seen a reduction in broad-based emerging market ETFs and an increase in asset flows to regional- or country-specific ETFs, notably those that track emerging Asian economies. For instance, INDA has brought in a net $1.6 billion in inflows year-to-date. [Explosive Growth for Single-Country ETFs]

“Those economies are held out to have reformist policies and strong governments,” Arone added.

For more information on developing economies, visit our emerging markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.