Bad News For EM ETFs: Fund Managers Paring Exposure

Amid another brutal day for emerging markets stocks and ETFs, comes this and it is no surprise: Fund managers have been reducing their exposure to the developing world. A survey by Bank of America Merrill Lynch indicates just 13 percent of global investors had overweight allocations to emerging markets equities this month, the lowest level since October 2011, according to Emerging Markets. Just over 250 panelists with $725 billion of assets under management were surveyed with 200 managers, managing $578 billion responding, Emerging Markets reported. The results of the survey are not surprising given the dismal performance of emerging markets ETFs this year. The iShares MSCI Emerging Markets Index Fund EEM is lower by more than nine percent year-to-date. EEM tracks the MSCI Emerging Markets Index, which many money managers benchmark their emerging markets exposure to. The Vanguard FTSE Emerging Markets ETF VWO, the larges emerging markets ETF by assets, is also lower by about nine percent year-to-date. Struggles for EEM, VWO and related diversified ETFs have been exacerbated by these funds' significant allocations to the largest emerging markets. While VWO is gently trimming its exposure to South Korea as it shifts to the FTSE Emerging Markets Index, the ETF is still heavy on the likes of Brazil, China and Taiwan. China, South Korea, Brazil and Taiwan combine for about 55 percent of EEM's weight. Amid a spate of bad news pertaining to Petrobras PBR and Vale VALE among other Brazilian stocks, the iShares MSCI Brazil Capped Index Fund EWZ has slumped 8.2 percent this year. In the past week alone, the iShares FTSE China 25 Index Fund FXI has slid 6.7 percent. Earlier this week, the world's second-largest economy reported first-quarter GDP growth of 7.7 percent, missing economists' estimates calling for eight percent growth. India ETFs have struggled as well, falling on concerns a bloated government budget will cost Asia's third-largest economy its investment-grade credit rating. Managers that responded to the survey are now a net 27 percent underweight India, Emerging Markets reported. Benchmark exposure to India would be in the area of 6.6 percent as EEM has a 6.64 weight to the country. There have been signs professional managers have been reducing their emerging markets exposure. When 13F filings for the fourth quarter of 2012 were released earlier this year, Harvard Management, showed significantly lower stakes in a broad swath of emerging markets ETFs. The largest U.S. university endowment slashed its investments in ETFs such as EWZ and FXI along with liquidating entire positions in funds such as the WisdomTree India Earnings ETF EPI and the iShares MSCI Poland Capped Investable Market Index Fund EPOL. On the bright side, money managers are increasing their exposure to select developing economies. Survey respondents said they have a net 53 percent overweight to Turkey and a net 47 percent overweight to Thailand, Emerging Markets reported. Exposure to Malaysia and the Philippines was also increased this month, perhaps underscoring the notion that select smaller emerging markets have been leaders this year. That much is proven by the returns. The iShares Philippines Investable Market Index Fund EPHE, the iShares MSCI Thailand Investable Market Index Fund THD and the iShares MSCI Turkey Investable Market Index Fund TUR are up an average of 11 percent this year. The PowerShares DWA Emerging Markets Technical Leaders Portfolio PIE, which allocates over 31 percent of its weight to those three countries, is up nine percent year-to-date. For more on emerging markets ETFs, click here.