Investors poured $10B into US emerging market ETFs in 2023

Investor confidence is finally returning to emerging markets as equities and bonds rally this month, luring fresh capital into exchange-traded funds that revolve around the asset class.

Net deposits into U.S.-listed ETFs that invest across developing economies — as well as those that target specific countries — totaled $766.1 million in the week ended Nov. 24, building on gains of $1.57 billion in the previous week, according to data compiled by Bloomberg.

That’s helped inflows into emerging-market ETFs top $10 billion so far this year. Across Wall Street, analysts have been boosting wagers that the Federal Reserve has reached the peak of its monetary-tightening cycle, paving the way for more gains ahead for risky assets. 

“EM today is perhaps a beneficiary of a more optimistic global recovery narrative that plays into needing more commodities and securing resources,” according to Juan Perez, director of trading at Monex USA. 

While MSCI Inc.’s key gauge of developing stocks edged lower on Monday, the index has rallied for four successive weeks in November. Sovereign bond yields have shed 84 basis points on average since late October, while 19 of 23 emerging-nation currencies tracked by Bloomberg are set for monthly advances.

Sentiment has been improving for emerging-market stocks after a roller-coaster year sent them to a record low against U.S. peers. As bets for a dovish Fed in 2024 builds, analysts have upgraded earnings estimates for companies in the MSCI gauge for eight successive weeks, the longest run since February 2022. That’s sent emerging-market stocks to a valuation discount of 39% versus their U.S. peers, approaching the widest level in a year.

The iShares MSCI Emerging Markets ex China ETF capped seven successive weeks of net deposits, drawing a total $2.1 billion. That, combined with the equity gains, has boosted the fund’s assets by almost 50% in this period.

An ETF tracking Argentina’s stocks, meanwhile, attracted its biggest weekly inflow in almost a decade after president-elect Javier Milei signaled a more moderate tone ahead of taking office next month. The $78 million Global X MSCI Argentina ETF saw a weekly inflow of $13 million last week, its second largest since the fund was launch in 2011. 

Elsewhere, Israel’s central bank on Monday laid out its most detailed assessment yet of the economic implications of the war with Hamas, as it holds off on interest-rate cuts in favor of stabilizing markets.