Traders dumped exchange-traded funds tracking emerging-market stocks at the fastest pace in over a year last quarter amid concerns over the slowdown in China, a selloff in commodities and the prospect of higher interest rates in the U.S.
Investors pulled $6.1 billion from U.S.-traded ETFs that offer exposure to a basket of developing-nation equities in the three months through September, the most since the first quarter of 2014, according to data compiled by Bloomberg. Exchange- traded funds that invest in both emerging-market stocks and debt as well as individual countries saw outflows in 12 out of 13 weeks ending Sept. 25, with losses totaling$12 billion, the data show.
The withdrawals came amid mounting evidence of slowing Chinese economic growth and as the Federal Reserve moved closer to an increase in the near-zero U.S. rates that have supported demand for riskier assets in developing nations. The concerns have roiled emerging markets from Colombia to Kazakhstan and spurred a deepening of the rout in commodities, further dimming sentiment toward countries like Russia and Brazil.
“When you have all the headwinds emerging markets are facing, it really takes investors with a strong stomach to try to put money to work there,” David Mazza, head of ETF research at State Street Global Advisers, said by phone in New York. “Emerging markets are universally hated, and investors continue to not find a catalyst for a reversal in performance.”
The ETF withdrawals mirror broader emerging-market outflows during the period. Investors have pulled $40 billion from developing-economy stock and bond funds in the third quarter, fleeing emerging markets at the fastest pace since the height of the global financial crisis in 2008, according to the Institute of International Finance.
The redemptions intensified after China’s equity boom turned to bust as mainland shares plunged from their June record and the government took unprecedented measures to shore up stocks, including banning major shareholders from selling and curbing index futures trading. The Shanghai Composite Index fell 29 percent in the third quarter, the most since 2008.
Stocks in Brazil slid to a six-year low in the third quarter on concern that the country, which Standard & Poor’s downgraded to junk in September, will struggle to recover from the worst recession since the 1930s amid a political stalemate and a corruption investigation.
FundsOversold
Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital, says the selloff has gone too far as the biggest risks associated with developing markets have already been priced in.
“Some funds in the emerging markets are oversold,” Bajaj said by phone in New York on Wednesday. “Eventually it will level off, and at some point that will stabilize and we’ll see more inflows back into the funds.”