Investors are shifting their focus toward emerging market funds and bond funds from U.S. equity funds after President Trump's healthcare bill failed to secure enough votes in Congress. EPFR Global's latest fund flow report reveals that investors are preferring emerging market securities and bonds over domestic equity funds.
Moreover, recently released economic data indicates that growth in major emerging markets, including China and India, is gradually picking. Such forecasts make these countries lucrative investment propositions. Additionally, the recent shift toward safe-haven investments like bonds following a Trump-led uncertainty has made bond funds from emerging markets a strong investment choice.
Emerging Markets Funds Post Steady Inflows
The domestic equity market registered steep declines recently after the euphoria over Trump's election fizzled when the new administration failed to secure enough votes for Trump's much talked about healthcare bill. Following this development, domestic equity-based funds saw heavy outflows of $8.9 billion in the week ended March 22, the biggest decline since June 2016, as per EPFR Global's latest weekly fund flow report.
According to Lipper's weekly fund flow report for the same period, equity fund flows were mixed last week. International equity funds saw total inflow of $1.3 billion, while domestic equity funds shed $44 million. Additionally, stock funds having significant exposure in emerging markets attracted around $0.312 billion.
Bond funds also registered strong inflows last week. Taxable bond funds registered net inflows of $8.3 billion, the highest weekly gain in the last eight months. Further, emerging market bond funds reported net inflows of $0.819 billion. High-yield corporate bond funds and municipal bond funds posted net inflows of $0.736 billion and $0.055 billion, respectively.
Why Buy Emerging Market Bond Funds?
The Trump-led rally took a beating recently, after his administration failed to secure enough votes for the much talked about healthcare bill. Trump suffered a major blow after the Republicans withdrew the American Health Care Act. This withdrawal came as a shock for investors and cast doubts over the implementation of Trump's other policies, including his tax reforms and fiscal stimulus measures.
In contrast to the domestic market, emerging market stocks are shining. One of the major emerging markets, China, flaunts strong economic growth. The country's GDP expanded 6.8% year over year in the fourth quarter, beating forecasts of a 6.7% increase, and posted the best quarterly increase in the last four quarters.
Another well-known emerging market, India, also registered strong growth following a higher-than-expected rise in its fourth-quarter GDP and victory of the nation's ruling party in some state elections. India's GDP expanded 7% in the October-December quarter, way above economists' expectations of 6.4%.
Buy These 4 Emerging Market Bond Funds
The recent turmoil in the U.S. equity market and strong expansion in emerging markets call for investments in emerging market bond funds. According to Morningstar, the emerging market bond fund category posted three-month, year-to-date (YTD) and one-year returns of 4.4%, 4.2% and 11.2%, respectively.
This encouraging backdrop warrants investor focus on four global equity mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have impressive year-to-date and one-year annualized returns. They also have minimum initial investment within $5000 and low expense ratios.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
Fidelity Advisor Emerging Markets Income A (MUTF:FMKAX) invests a major portion of its assets in debt securities of companies based in emerging markets and other investments that are linked economically to these markets.
The fund has three-month and YTD returns of 4.9% and 4.4%, respectively, and an expense ratio of 1.13% as compared to the category average of 1.15%. FMKAX has a Zacks Mutual Fund Rank #1.
Payden Emerging Markets Bond Adviser (MUTF:PYEWX) invests a bulk of its assets in debt securities which are issued by governments and agencies located or headquartered in the emerging market nations.
The fund has three-month and YTD returns of 4.2% and 4%, respectively, and an expense ratio of 1.00% as compared to the category average of 1.15%. PYEWX has a Zacks Mutual Fund Rank #2.
T. Rowe Price Emerging Markets Bond (MUTF:PREMX) provides current income and capital appreciation. PREMX invests a large portion of its assets in government and corporate debt securities of the emerging nations.
The fund has three-month and YTD returns of 4.6% and 4.2%, respectively, and an expense ratio of 0.92% as compared to the category average of 1.15%. PREMX has a Zacks Mutual Fund Rank #1.
Fidelity New Markets Income (MUTF:FNMIX) invests the majority of its assets in debt securities of issuers in emerging markets and other investments that are tied economically to these markets.
The fund has three-month and YTD returns of 5% and 4.6%, respectively, and an expense ratio of 0.83% as compared to the category average of 1.15%. FNMIX has a Zacks Mutual Fund Rank #1.