ETFs making emerging markets vulnerable to sudden outflows: Citi

The $244 billion invested in emerging-market ETFs is about 19 percent of the total invested in emerging-market mutual funds, according to the firm

Aug 16, 2017 @ 1:00 pm

By Bloomberg News

Add Citigroup Inc. to the list of analysts and investors concerned by the bumper inflows into emerging-market ETFs this year.

After attracting almost $47 billion of new cash so far this year, exchange-traded funds have made developing nations more vulnerable to sudden outflows, Citi analysts Luis Costa and Toller Hao said in a research report published this week.

The "ETF-ization" of emerging markets has "made ETF flows themselves increasingly representative of asset class sentiment as a whole," the note said. "If the tide turns, this strong positive directionality towards passive investments and ETFs can turn into a negative directionality."

The analysts' unease echoes similar warnings from Bank of America Merrill Lynch and Schroder Investment Management, which cautioned last month that a pullback from emerging markets similar to the 'Taper Tantrum' of 2013 would be exacerbated by the increased share of ETFs in the market. The $244 billion invested in emerging-market ETFs is about 19 percent of the total invested in emerging-market mutual funds, according to Citi.

Morgan Stanley analyst Min Dai disputed the concerns in a research note published last month, saying that ETFs are still a small proportion of the total invested in emerging markets. He estimates the funds account for less than 5 percent of the tradable market in stocks, sovereign credit and local currency.

Dai also estimates that up to 25 percent of the investments in the funds is owned by institutional investors, especially cross-asset funds. Those investors are using ETFs to gain exposure to developing nations and typically take a long-term approach to asset allocation, suggesting a rapid sell-off is unlikely.

Still, Costa and Hao said that ETFs and other passive funds had grown in popularity against more active managers, thanks in part to a long spell of low yields and volatility. "In a very paradoxical way, not all kinds of investors benefit from long lasting periods of risk compression," they said.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

WisdomTree's Maute: Developing elegant tech-enabled solutions

Advisers need unique technology-enabled solutions in order to have more time to expand their practice, according to WisdomTree's Alisa Maute. What can be done today to create a more thriving business of tomorrow.

Latest news & opinion

Nontraded REITs to post worst sales since 2002

The industry is on track to raise just $4.4 billion, well off the $19.6 billion it raised just four years ago, as new regulations hinder sales.

Broker protocol for recruiting a boon for clients

New research finds advisers whose firms have joined the agreement take better care of customers.

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print