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Emerging market ETFs chalk up new record inflows in February

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Flows into emerging market equity exchange traded funds marked a new record in February, as activity by China’s “national team” appeared to continue at pace.

EM equity ETFs sucked in $28.2bn, an increase of more than 20 per cent on the previous record set in January of $23.3bn and a third of the $85.5bn in total captured by equity ETFs globally during the month, according to BlackRock.

The vast majority of this money was ploughed into domestic Chinese equity ETFs, as was the case last month when BlackRock data showed that 99 per cent of the money pumped into EM equity ETFs went into vehicles listed in the Asia-Pacific region.

While the percentage has moderated — US and Europe-domiciled EM ETFs accounted for 18 per cent of the total in February, according to Karim Chedid, head of investment strategy for BlackRock’s iShares arm in the Emea region — the flows are consistent with widely observed, continued heavy buying by China’s so-called national team of state-affiliated institutions.

Nonetheless, Chedid said there were signs in February of broader interest. “The majority [of EM ETF flows] is Asia-domiciled but there has been a pick-up in US and EU domiciled ETFs,” said Chedid, pointing out that nearly $2bn of the total in February was from Europe-domiciled vehicles.

He said India had been the big standout. Global flows into single country India ETFs for February were $1.91bn, according to BlackRock.

Peter Sleep, senior portfolio manager at 7 Investment Management, said overseas investors’ poor sentiment on China has been hiding some of the India success story.

“I think EM flows [from outside China] may have been obscured recently with the outflows from China masking the inflows into India and other countries,” he said, adding: “China seems to be less negative now, which makes broad EM look a bit better.”

Broadly, aside from the emerging market numbers, Sleep said the “data is so messy it is difficult to pick a trend”, with some analyst reports appearing to contradict one another.

This is demonstrated by another strand touched on in BlackRock’s own data. Chedid drew attention to the buying of European equities, which reached $1.9bn. US interest in European equity ETFs, which accounted for $0.9bn of the flows, was the strongest since February 2023.

Line chart of Cumulative flows ($bn) showing Interest in European equity ETFs appears to be on the rise again

“The data is telling us that people are starting to buy European ETFs,” Chedid said.

But Bryan Armour, director of passive strategies research for North America at Morningstar, said that on closer inspection a slightly different picture emerged.

Morningstar’s own numbers, which differ a little from BlackRock, indicated that of the $1bn that it counted in flows to European equity ETFs domiciled in the US, 75 per cent went into the JPMorgan BetaBuilders Europe ETF (BBEU), a $7.5bn vehicle. “JPMorgan customers own 80 per cent of those assets, so it likely stemmed from a shift in their internal portfolios,” Armour said.

“US investors are spreading out new investment across a wider range of asset classes because of the concentration in tech-related stocks at high valuations in the US market. But the inflows to Europe ETFs weren’t a good example of that,” he added.

Nonetheless, Todd Rosenbluth, head of research of VettaFi, said the flows to BBEU could be interpreted as a diversification away from US home market bias and a vote of confidence in Europe’s broader macroeconomic picture.

More interesting to him, though, was the move in US markets to so-called “quality” stocks.

“Despite a strong stock market, investors have focused on higher quality ETFs that own companies with strong balance sheets and consistent earnings and cash flow,” he said, pointing to robust flows into vehicles such as the Pacer US Cash Cows 100 ETF (COWZ) and the VanEck MSCI International Quality ETF (QUAL).

That move to a more discerning stance was also one recommended by Chedid, in relation to buying ETFs with European exposure.

“We still think it’s better to be selective. The focus should be on quality,” he said.

For many observers, however, the lack of a clear opinion among investors is where the interest lies.

“There doesn’t appear to be consensus about where US investors are diversifying right now, which is something we will be intently watching,” said Armour.

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