According to statistics collated by Bloomberg on US-based funds, actively managed ETFs have drawn close to half a billion dollars over the past month, particularly those with exposure to Latin American companies and India’s globally renowned growth. At the same time, investors withdrew $3.5 billion from passive strategies that focused heavily on China.
While ETFs are becoming more and more popular as a convenient way to access remote areas of the financial markets, investors in passive vehicles must deal with the disadvantages of a fixed strategy. Everyone, from small-time traders to seasoned asset managers, is beginning to recognise the extent of Beijing’s failure to deliver on its promised post-Covid growth, as evidenced by the rotation to active funds.
You wouldn’t want to follow an index mindlessly or without thinking, right? said Donald Calcagni, head of investment management at Mercer Advisors. It’s a chance to reconsider our allocations to emerging markets and think about regional diversity with more open-mindedness.
One of the largest US-based ETFs with a concentration on broad developing markets, the $21.6 billion iShares Emerging Markets ETF, saw trader withdrawals of more than $2 billion in August. A third of the fund’s money is invested in China. A BlackRock ETF that invests in emerging economies outside of China, meanwhile, has received $945 million this quarter alone, its largest inflows ever.
It’s a significant outflow, especially given that money is being poured into a fund that is identical but doesn’t hold any Chinese assets. According to information gathered by Bloomberg, the iShares MSCI Emerging Markets ex China ETF completed its 11th consecutive month of inflows in August.
The largest ETF tracking Latin American companies has seen its investment volume increase by half a billion dollars in just three months. Additionally, Global X Management has recently introduced new exchange-traded funds (ETFs) that specialise in investing in stocks from particular nations, like Brazil and India.
Variable Demand
These new trends have the potential to have a significant impact on emerging economies, which have traditionally been more difficult for mainstream investors to access.
According to data compiled by Bloomberg as of September 7, three of the seven US-listed ETFs tracking emerging markets that have attracted at least $1 billion this year are actively managed instruments that allocate more capital towards assets in India and provide less exposure to China than passive peers.
For traders, this has paid off as India’s sizable middle class and swift economic growth sustain its financial assets. Brazilian equities are up as officials start an easing cycle, while Mexico’s stock market is among the greatest performers of 2023.
Latin America and Southeast Asia are two strong examples of emerging countries where we are seeing opportunities outside of China, according to Robeco Institutional Asset Management portfolio manager Daniela Da Costa-Bulthuis, who is based in Rotterdam. “The so-called nearshoring trend,” which involves businesses attempting to be nearer to US consumers, favours these nations and is significant over the long term.
But it can be difficult to find more exposure to these nations in broad, passive ETFs, according to Malcolm Dorson, head of emerging-market strategy at Global X. Investing more readily in high-conviction bets in nations that still only make up a small fraction of broad benchmarks is a benefit of active ETFs, he said.
Despite making up only 4% of all EM funds, active ETFs focused on emerging markets generated more than 40% of new capital from June 1 through September 6, according to Bloomberg Intelligence. This is another proof that actively managed strategies are dominating the ETF market, as active assets for US-listed funds hit a record $444 billion as of July, according to data from Bloomberg Intelligence.
For instance, according to data gathered by Bloomberg, the Avantis Emerging Markets Equity ETF has attracted over $1.2 billion this year, increasing its holdings by nearly 40% since January. The strategy can change its portfolio on a daily basis depending on liquidity, asset performance, and governance issues, and it has a bigger exposure to India, Brazil, and Mexico than its passive peers.
By providing additional exposure to Indian companies and an underweight allocation to China, two other actively-managed strategies from Dimensional Fund Advisors LP, identified by their tickers DFEM and DFAE, have also drawn a torrent of new cash this year.
Compared to the less than 2% increase in MSCI Inc.’s emerging-market stock index, shares of all three active ETFs have increased by at least 6% so far this year.
“India is the best structural story in the world,” declared Dorson. “To not hold India now is essentially to not hold China twenty years ago. I believe that people are structurally underinvested in the country because it is a long-term hold that is established and forgotten.
The rate for the People’s Bank of China’s medium-term loan facility with a one-year maturity is anticipated to be reduced once more. Additionally, traders will keep an eye on credit, activity, and price data for clues that the economy requires additional policy support.
India will publish industrial production data for July and August CPI data.
Following an increase for emergencies in August, the Bank of Russia is anticipated to maintain its policy rate at 12%.
The August inflation report for Brazil will provide information on whether authorities maintain their pace of cutting interest rates by 50 basis points.
Argentina’s August inflation reading is predicted to be in the double digits as investors anticipate the elections in October.
According to Bloomberg Economics, Peru’s central bank will likely reduce its benchmark rate from 7.75% to 7.50%.