Responding to BlackRock's (BLK -0.4%) move to cut fees on 15 of its popular ETFs, Schwab (SCHW -0.7%) announces trimmed costs on five of its widely-used funds. The cuts affect abut $18B in AUM, or 35% of the total in Schwab ETFs.
The fee for the Schwab U.S. Aggregate Bond ETF is falling to 0.04% from 0.05% BlackRock this week cut the fee on its AGG to 0.05% from 0.08%.
The Schwab U.S. Small-Cap ETF (NYSEARCA:SCHA) is cut one basis point to 0.06%. BlackRock cut the fee on its iShares S&P SmallCap 600 Index ETF (NYSEARCA:IJR) to 0.07% from 0.12%.
The Schwab U.S. Mid-Cap ETF (NYSEARCA:SCHM) is cut one bp to 0.06%. The Schwab International Equity ETF (NYSEARCA:SCHF) is cut one bp to 0.07%. The Schwab Emerging Markets ETF (NYSEARCA:SCHE) is cut one bp to 0.13%.
Lee Kranefuss - one of the founders of iShares - says not to be surprised to see someone make headlines with a zero fee fund, but don't look for that for whole fund families.
Oil's resurgence and the hope the Fed will stay cautious on rate hikes make for good excuses as emerging market valuations climb to their highest level in a year - trading at an average 12.2x projected 12-month earnings.
Alongside that, volatility on the MSCI Emerging Markets Index (ETF: EEM) has fallen to its lowest since July 2015.
Investors pulled a record $72.6B, or 8% of AUM, from emerging market funds last year, according to EPFR, well more than the $39B pulled amid the global financial crisis in 2008.
2015 was the third consecutive year of outflows, with $23B exiting in 2014 and $16B in 2013.
Since July, emerging market funds have seen outflows in 22 of 25 weeks.
Capitulation? Not yet, says Morgan Stanley's Jonathan Garner. In the current streak of nine straight weeks of outflows, $12.5B, or 1.7% of AUM has exited. It's typically taken outflows of more than 4% of AUM over a 10-week stretch to create a strong tactical buy signal for EM.
There have been emerging market equity fund outflows for 16 of the past 19 weeks, and debt fund outflows in 23 of the past 26, according to the latest fund flow data from BAML. Year-to-date fund outflows of $86B is tops since 2008.
For perspective, European equity funds have seen inflows for 25 of the past 27 weeks.
While China's devaluation complicates things, "humiliated emerging markets are ripe for a bounce as Fed expectations peak," says the team.
It shouldn't come as too much of a surprise given Ray Dalio's bearish turn on China over the summer, but new filings show Bridgewater Associates cut its stake in the Vanguard FTSE Emerging Markets Index (NYSEARCA:VWO) to 67M shares ($2.4B) at the end of September from 113M at mid-year. The hedge fund firm also slashed its stake in the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) to 36.5M shares ($1.2B) from 62M.
"Many hard commodity prices are likely to suffer another leg down,” says Henry McVey, global head of macro and asset allocation at KKR. "We would view any recovery as a bounce, not a sustained re-acceleration in the Chinese economy, as the structural headwinds remain significant.”
Concerned over high debt levels and weakening currencies, McVey warned investors last May to steer clear of emerging market companies just ahead of a 20% decline in the MSCI emerging market gauge over the following four months.
"Looking at the big picture, our key conclusion from the trip [to Asia] is that the slowdown we are seeing in China is secular, not cyclical."
"Our view is that we are in the beginning stages of the next contractionary cycle, and this cycle, similar to 1997-1998, is commencing on the emerging market side of the global imbalance," say the managers of Fortress' Convex Asia Fund. "We believe we are three weeks into what is likely an 18-plus month contractionary period, using past cycles as a guide.”
In this, the team at Fortress is joining a number of other investors, including Ray Dalio, who says the impact of EM losses will be more widespread than previous crisis thanks to more money now invested in those markets.
The Convex fund gained 3.2% in August, bringing YTD returns to 1.4%.
"Now is the time to be hedged," says Convex, predicting a "wild" next 18-24 months, particularly with the upcoming U.S. presidential election.
"Emerging market cyclical activity is weak, debt overhangs in China and other emerging markets will likely weigh on growth for some time," says the team at Goldman, cautious on EM even after recent big moves down.
Especially notable, says Goldman, is that the last Fed tightening cycle (2004-06) came amid strong emerging market growth and surging commodity prices. A Fed tightening cycle this time around will occur amid just the opposite conditions.
A net decline of 0.7% in emerging markets funds last week brings the four-week decline to 3.7%, and the YTD falloff to 5%. For the month of August, money exited Asia and Eastern Europe, but rose for Latin America, with Mexico (NYSEARCA:EWW) leading the way.
Also among those with inflows is Russia for the third consecutive month, perhaps as investors chase performance - the Market Vectors Russia ETF (NYSEARCA:RSX) is up 11% for the year.
Outflows from emerging market bond funds like EMB hit $4.2B in the week ending Aug. 26, the second-largest amount ever. Overall emerging market net outflows of $10.5B were the largest since early 2008.
Turning back to bond funds alone, outflows over the last three weeks of $7.5B represent 2.9% of AUM, says Morgan Stanley.
EMB is lower by more than 5% since a late-April high, and in stocks, EEM is off nearly 20% over the same time frame.
A slump in emerging market confidence has led to $1T in capital outflows over the past 13 months, roughly double the amount that fled during the financial crisis.
The sustained exodus of capital highlights concerns that developing economies, suffering slowing growth and weakening currencies, are relinquishing their longstanding role as locomotives to become a drag on demand instead.
Pros are bailing out of emerging markets, commodities, and energy-related stocks at a record pace, according to the latest BAML fund manager survey. A "late-summer pain trade" leading way to a rally could be at hand, says Michael Hartnett, BAML's chief investment strategist.
"Fears on Greece have been replaced by fears of Chinese recession/EM debt crisis," says Hartnett, noting more than 50% believe China is markets' biggest tail risk at the moment.
The relative positioning of emerging markets (EEM, VWO) to developed markets at -55% is the lowest on record (since April 2001), and allocation to the energy sector (NYSEARCA:XLE) - where a net 30% of managers are underweight - is the lowest since February 2002.
"Caution is in the air," says BAML's Michael Hartnett, noting rising cash levels (4.9% vs. 4.5% in May) in his bank's latest fund manager survey. The proportion of those overweight equities fell to 38% from 47%.
Topping worries are expectations of higher U.S. rates, a negative resolution for Greece, and ideas China is in a bubble - those expecting to underweight emerging markets jumped to 21% from 6% last month.
The most crowded trade at the moment is long greenbacks - 72% see the euro weakening vs. the dollar in the coming year.
Due to a slowdown in emerging markets and softer output in the U.S., the World Bank downgraded its outlook for global economic growth this year, lowering its forecast by 0.2% to 2.8%. The bank expects growth of 3.3% in 2016.
With regards to the U.S., the World Bank decreased its 2015 prospects by 0.5% to 2.7%, saying a brutal winter sapped output in Q1 despite the economy now gathering steam.
U.S. rate hikes are likely to be painful for emerging markets, says BNP Paribas' Orrin Sharp-Pierson, noting just a 26% chance of a rate hike by September is currently priced in. Should a boost in interest rates actually occur in this window, the surprise and withdrawal of liquidity might not be pretty for EM.
On the other side of the trade are European equities as the ECB has pledged to continue QE for more than another year. Given the effect on the euro, the most popular of the European ETFs of late - WisdomTree's Europe Hedged Equity Fund (NYSEARCA:HEDJ) - is the place to be.