Country ETFs: It’s All about Yield and Foreign Exchange
Inflows: EEM, a neverending story
Inflows into emerging market equity ETFs keep on dominating the inflow picture within our country ETF universe. As you can see in the chart below, three out of the top five country ETFs that saw the largest weekly inflows provide emerging market exposure. iShares’ MSCI Emerging Markets ETF (EEM) took the number-one spot, Vanguard’s FTSE Emerging Markets ETF (VWO) ranked third, and iShares’ Core MSCI Emerging Markets ETF (IEMG) took the number-four spot.
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Notably, cumulative net flows into all three emerging market ETFs hit YTD (year-to-date) highs last week. So it seems that investors who missed 2016’s turnaround in emerging market equities continue to chase the trend. We discussed the main drivers that explain the massive YTD inflows into emerging market equities in detail in recent weeks. Yet as emerging market exposure remains in high demand, we list the most important drivers again below.
- Yield-hungry investors have come to terms with exposure to volatile emerging market economies in exchange for higher yields.
- Bonds in countries like Brazil (EWZ) and Turkey (TUR) are in high demand as the Federal Reserve’s hesitation to hike rates has kept a lid on US Treasury yields.
- EEM, IEMG, and VWO have become momentum plays as all three ETFs continuously marked new YTD highs in recent weeks.
Outflows: Eurozone ETFs and DXJ continue to see outflows
Capital outflows within our country ETF have been dominated by two global market themes:
- uncertainty surrounding Europe’s economic and political landscape without the United Kingdom
- diminishing demand for currency-hedged ETFs: the expected weakness in the euro and the Japanese yen (against the US dollar) hasn’t played out
The chart below illustrates the continuation of these themes.
Note that five of the ten country ETFs that saw the largest outflows last week provide exposure to Europe. In fact, the following ETFs made up ~45% of total outflows last week.
- iShares MSCI Eurozone ETF (EZU)
- iShares MSCI Germany ETF (EWG)
- iShares Currency Hedged MSCI Germany ETF (HEWG)
- WisdomTree Europe Hedged Equity Fund (HEDJ)
- Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU)
Keeping these trends in mind, we suspect Europe’s future will remain one of the most-watched investment themes going forward.