March Fund Flows: Emerging Market ETFs Hoover Up Assets

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Includes: EEM, EMB, IEMG
by: Michael Krause

Summary

Money continued to flood into ETFs in March.

Emerging market equities and bonds captured an outsized share of new money.

Short interest rises, especially in fixed income.

The flood of money into ETFs continued in March, though not quite as robust as at first blush. According to our database, equity funds saw roughly $39.6 billion in new money for the month, while bond ETFs captured some $9.2 billion, representing increases in overall assets under management of 1.8% and 1.9%, respectively. However, after adjusting for increases in short interest, the "net long" inflows were somewhat lower, at $34.9 billion for equities and $6.7 billion for bonds (Figure 1).

We believe "net long" flows provide better insight into investor sentiment, since some inflows are used to create new short positions. Overall, short interest in equity funds ticked up from 6.8% to 6.9% of shares outstanding, but for bond funds increased from 3.3% to 3.8% - still small relative to total shares outstanding, but nonetheless an increase of 14% in shares held on the short side, most likely a reflection of investors' anticipation of higher interest rates (Figure 2).

Figure 1: Flows by Asset Class
Standard vs. Net Long, March 2017, in $ billions

Figure 2: Short Interest
as a %age of Shares Outstanding

Flows_201703

SI_201703

Source: DTCC and ETF Research Center

Source: DTCC, FactSet and ETF Research Center

One consistent trend across both equity and fixed-income markets was investors' enthusiasm for emerging market assets. In absolute terms, emerging market ETFs have a much smaller asset base than their developed market counterparts of course, but they drew in an outsized portion of new money last month. Specifically, only 8.0% of all equity ETF assets were invested in emerging market stocks as of the beginning of March, but these ETFs took in 15.8% of net long flows during the month. As a result, net long emerging market ETF assets grew 3.5%, while developed markets increased just 1.5%.

The big winner here was the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG), which saw total inflows equivalent to about 10% of assets, a big jump in one month for such a large fund. The $27 billion IEMG is now almost as big as the bellwether iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), which has $30 billion in assets. There's huge overlap between the two, but for investors looking to choose one, we'd go with IEMG, which is more diverse and much cheaper at 14 basis points, compared to a stated expense ratio of 72 basis points for EEM.

The disparity was even more pronounced on the fixed-income side. Long money flows for emerging market bond ETFs totaled 8.2% of assets, far outstripping other categories (Figure 3). Here again the biggest beneficiary was an iShares fund, its J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA:EMB), which took in more than half a billion dollars in new money, growing assets to nearly $10 billion.

Corporate bond ETFs - which include both investment grade and "junk" bonds - are an interesting case. The segment actually had positive inflows of about $1.6 billion, or 1.0% of assets under management. However, there was a large increase in short interest, from 4.1% to 5.7%, for a roughly one-third increase in total shares held short! That's an increase of about $2.6 billion in AUM on the short side, thus "wiping out" the $1.6 billion inflows measured the standard way. The result is therefore equivalent to a small outflow of funds (as shown in Figure 3).

Figure 3: Fixed Income Fund Flows by Category
as a %age starting AUM, March 2017

Source: DTCC, FactSet and ETF Research Center

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.