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After years entrenched in safe investments, investors are finally coming out of hiding and taking greater bets on riskier emerging market exchange traded funds.

At the end of the fourth quarter, exchange traded product, which included ETFs and exchange traded notes, flows revealed greater risk appetite, with heavy inflows to emerging market equity and debt funds, according to a BlackRock Investment Institute research note.

"Inflows are powered by an appreciation for the emerging world's improving fiscal, governmental and economic conditions," BlackRock said.

Specifically, emerging market equity funds attracted a record $27.1 billion in the fourth quarter, over double the amount in the third quarter of 2012, driven by tripling flows into China-related ETPs to $12.2 billion after the Chinese elections. Emerging market ETPs have accumulated $276 billion in assets under management, or one fifth of total equity ETP assets.

  • Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO)
  • iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM)
  • WisdomTree Emerging Markets High-Yielding Equity Fund (NYSEARCA:DEM)

Meanwhile, developed market equities saw inflows of $30 billion, diminishing a third from new third quarter inflows.

Additionally, emerging market bond funds attracted $3.7 billion in new inflows over the fourth quarter, with overall fixed-income inflows rising 28% compared to the previous quarter to $15.8 billion.

Looking at emerging market debt funds, Brazil, Mexico and Russia make up the top three country allocations.

Investors who are interested in emerging market debt should make the distinction between USD and local currency denominated emerging market bond ETFs. With USD-denominated funds, investors would not benefit from strengthening emerging market currencies.

"Foreign currency appreciation furnished 60% of total returns of emerging market debt in the past eight years," BlackRock said.

U.S. dollar denominated emerging market bond ETFs:

  • iShares JPMorgan USD Emerging Markets Bond Fund (NYSEARCA:EMB)
  • PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY)

Local currency emerging market bond ETFs:

  • WisdomTree Emerging Markets Local Debt Fund (NYSEARCA:ELD)
  • Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA:EMLC)

Max Chen contributed to this article.

Full disclosure: Tom Lydon's clients own DEM, EEM, and EMB.

Source: Rising Interest In Riskier Emerging Market ETFs