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Tom Lydon on CNBC: Rate Decision is Key for Emerging Markets

This article was originally published on ETFTrends.com.

Monday's trading session began with more sell-offs in U.S. equities with the Dow Jones Industrial Average losing over 500 points as a key rate decision by the Federal Reserve looms, which could impact emerging markets exchange-traded funds (ETFs).

The capital markets are widely expecting a fourth and final rate hike to cap off 2018 with algorithms like the CME Group's FedWatch tool expecting a 69.7 percent chance of a rate hike on Wednesday. In the events leading up to the latest rate decision, the central bank has been offering the media sound bytes with increasingly dovish tones.

With rate hikes taking a toll on emerging markets ETFs, it could be the trigger event these funds need to shake out of their 2018 doldrums if the rates remain unchanged or Fed Chair Jerome Powell hints that 2019 will see less rate hikes. Moreover, a rate hike could see investors in general stay out of an already downtrodden stock market.

"If we do see a Fed hike this week, from an emotional standpoint many investors may move to the sidelines," said ETF Trends Publisher Tom Lydon during CNBC's "Closing Bell" segment on Monday.

Nonetheless, investors' actions are speaking louder, particularly in the ETF space. From a year-to-date standpoint, capital has been flowing into ETFs to the tune of $280 billion with a total of $3.52 trillion total assets sitting in ETFs.

"ETF flows tell us a lot. Since the low in 2009, investors have bought the dips--they haven't yet, but they haven't sold," added Lydon. "So far, we've had record inflows into ETFs this year, which have been very positive."

Shrewd Emerging Markets Investors

Whether it's investor shrewdness or overexuberant hope, capital allocators into emerging markets still won't budge, according to Lydon. The markets continue to witness flows into the EM space as investors are beginning to see opportunities abroad as volatility reigns in the U.S. capital markets.

In the last 30 days, emerging markets have been relatively flat while major U.S. indexes like the S&P 500 have lost 4 percent. ETFs like the iShares Core MSCI Emerging Markets ETF (IEMG) have seen inflows of $2.8 billion within the last month.

"Surprisingly, more people buying emerging markets than selling emerging markets," said Lydon.

The U.S. stock market has been the default play for investors during the historic, decade-long bull run, but the latest volatility may have steered them off course and opportunities abroad could be an alternative. Despite the deep declines in emerging markets this year, with respect to value compared to price, many of these ETFs from abroad present a profitable opportunity that can be realized, especially if China and the U.S. ameliorate their trade differences.

While the majority of investors might be driven away by the red prices in emerging markets, Lydon believes they should be looked at as substantial markdowns, especially if trade negotiations between the U.S. and China result into a tangible trade deal with permanence.

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