How slowing central bank trade is impacting emerging market ETFs

Investors are weary of the European and Japanese central bank trade, but what does it mean for emerging-market ETFs?

Investors are getting weary of the European and Japanese central bank trade – with means that inflows are surging for emerging-market exchange-traded funds, according to an ETF Strategy report.

US-listed emerging-market ETFs have taken in about $17 billion so far this year, while Europe-based emerging-market ETFs have taken in about $12 billion. That money was spread out across 54 Europe-based ETFs and 46 US-based ETFs.

“This trend is deep and wide; it’s not hust a few institutions getting excited,” Bloomberg senior ETF strategist Eric Balchunas told ETF Strategy.

The emerging-market boom is driven in part by increasing apathy toward investment in Europe and Japan. According to ETF strategy, global ETF outflows to the end of July hit -$30.7 billion out of Europe and -$0.7 billion out of the Asia Pacific region.

“The central bank trade is dead,” Balchunas told ETF Strategy. “The markets have since struggled a bit. The easy trade is over. Could it come back? Yes. But outflows are steady – and in some months violent – out of Japan and Europe.”

Investors are taking profit from those regions even though they’ve seen consistent positive performance, according to ETF Strategy.

 Meanwhile, the emerging-markets boom may depend on actions taken by the U.S. Federal Reserve.
“Can the emerging markets rally survive the Fed raising rates? I guess we will find that out,” Balchunas told ETF Strategy. “In the past money has scurried in and out of emerging-market ETFs around the Fed. But it could be that this trend is a genuine reallocation and people are becoming bullish.”