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Time for Emerging Market ETFs?

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Sanghamitra Saha
·4 min read
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Emerging market ETF investing is getting all the love from this month with Emerging Markets Internet & Ecommerce ETF (EMQQ) andrecorded the highest gains (up about 9.8%) in the block last week. Investors have recently shown considerable confidence in emerging market stocks over those in the United States, replicating their belief in the global economy’s recovery, per an article published on Barrons.

A net $5.7 billion influx of capital was noticed in the emerging market stocks lately, according to Bank of America strategists, as quoted on Barrons.That showed the 19th week of “large inflows” in the past 20, according to Michael Hartnett, chief investment strategist at BofA while U.S. stocks have seen capital exodus.

SPDR S&P 500 ETF Trust SPY has seen an outflow of $1.62 billion this month, while Invesco Emerging Markets Sovereign Debt ETF PCY and Vanguard FTSE Emerging Markets ETF VWO have recorded inflows of $19.88 million and $5.45 million, respectively.

The EMQQ has raked in about $44.5 million in assets, while KraneShares Emerging Markets Consumer Technology Index ETF KEMQ and Invesco DWA Emerging Markets Momentum ETF PIE generated respectively $5.5 million and $9.63 million in assets last week. Both funds were up a respective 8.6% and 7.8% last week.  All U.S. ETFs are not out of investor favor though as the pandemic winner Invesco QQQ Trust QQQ has fetched in about $1.31 billion in assets.

Why Emerging Markets Are Good Bets

Undervaluation

First, EMs have suffered a lot amid the pandemic. VWO has a P/E of 17.5X while SPY has a P/E of 23.79X. Hence, in the global relief rally bolstered by the vaccine rollouts, emerging markets have better potential to grow.

Better Growth Prospects

Emerging markets have long been investors’ choices owing to their high growth potential and rapid pace of industrialization. The EM growth potential has been stronger than developed economies. The signing of the phase-one U.S.-China trade deal and Biden’s win in the U.S. presidential election (who is less harsh on China on the trade front than Trump) also made the case for emerging market investing stronger.

Massive Fed Rate Cut

The U.S. central bank has been buying back bonds and has the key interest rates at the rock-bottom levels. Thanks to a dovish Fed, EM equities should be up for a stellar performance. A super-dovish Fed should keep the greenback’s strength at check. Invesco DB US Dollar Index Bullish Fund UUP was flat last week. Since EM equities tend to perform better in a low-rate and low-dollar environment, EM assets now have every reason to outperform.

High Interest Rates in EMs Than Developed Nations

Yields are higher in emerging economies. VWO yields 1.77% while SPY yields 1.47% annually. And if investors turn to bonds, gains should be even stellar. PCY yields about 4.46% annually. Chances of disinflation also favor a bond rally in the EM segment. A Bloomberg article recently pointed out that the projected inflation for a cross-section of developing nations will average 4.74% from 2026 to 2031 versus an average of 5.25% over the past five years, if we go by an analysis.

“The disinflationary outlook offers a potential capital gain and a stable high income from emerging-market debt,” according to Akira Takei, a global fixed-income money manager in Tokyo at Asset Management One Co., which manages the equivalent of about $510 billion, as quoted on Bloomberg.

Bottom Line

Against this backdrop, we can conclude that investors can have a look at the emerging market bonds and tech-related ETFs. These look to be safer bets currently (read: Disinflation in Emerging Markets? Buy EM Bond ETFs).

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SPDR S&P 500 ETF (SPY): ETF Research Reports
 
Invesco QQQ (QQQ): ETF Research Reports
 
Vanguard FTSE Emerging Markets ETF (VWO): ETF Research Reports
 
Invesco Emerging Markets Sovereign Debt ETF (PCY): ETF Research Reports
 
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