Risk Appetite: Are You Hungry Enough to Invest in These ETFs?
The bears have woken up in emerging markets around the world. The benchmark MSCI BRIC Index — which tracks equity performance in Brazil, Russia, India, and China, the four biggest emerging markets — is down about 7 percent on the year and about 4 percent year to date. Wary of economic instability and concerned that near- and mid-term growth prospects have evaporated, investors pulled a record $26 billion from major emerging-market exchange-traded funds (ETFs) like BlackRock’s iShares MSCI BRIC Index Fund (NYSEARCA:BKF) and Vanguard’s FTSE Emerging Markets ETF (NYSEARCA:VWO) over the past year, according to data compiled by Bloomberg.
The outflows reflect a particularly challenging environment for investors. The U.S. Federal Reserve’s aggressive monetary strategy stimulated yield-seeking investments in emerging markets. Now that quantitative easing is being wound down, the dollars are coming back, as evidenced by record outflows from emerging-market funds.
Agitating the situation are myriad other headwinds, from geopolitics in Russia to financial frothiness in China, which have spooked many investors. The BRIC countries no longer appear to be offering returns worth the risk, and the flood of yield-seeking money that washed into these emerging markets in the wake of the financial crisis is beginning to wash back out.
Investors, sensitive to the evolving monetary environment, have been not-too-quietly moving their money into markets expected to experience faster growth in the coming years, such as frontier markets. Frontier markets are even less established than emerging markets, and therefore generally offer more potential reward at a higher risk level. The performance of frontier markets is also rarely correlated with more established markets, making them an attractive investment for diversification.
Here’s a look at a couple of interesting frontier market ETFs.