In Battle For Assets, Emerging Markets ETFs Topped Europe Rivals In March

Year-to-date, emerging markets exchange-traded funds are displaying superiority over their Europe counterparts. For example, the Vanguard Emerging Markets Stock Index Fd VWO and the iShares MSCI Emerging Markets Indx (ETF) EEM (the two largest emerging markets ETFs) are both up 2.8 percent, while marquee Europe ETFs are in the red.

Pressure And Catalysts

Europe ETFs have been plagued by disappointments from the European Central Bank and structural concerns regarding banking systems in some major eurozone markets. Although some new reforms and regulations are seen as steps in the right direction for the eurozone's fractured banking systems, the time it takes for investors to realize the rewards of such efforts can be trying on their patience.

Conversely, rebounding currencies and commodities prices have lifted emerging markets ETFs. Those performances have been enough to encourage investors to enter ETFs like EEM and VWO after a couple of years of pulling money from those funds. Investors' renewed affinity for emerging markets ETFs was on display last month.

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“Willing to take on more risk in March, investors put $5.6 billion of fresh money into well-diversified emerging market equity ETFs and $1.5 billion into sovereign emerging market bond ETFs, according to Factset data. However, investors reduced their exposure to previously popular European equity ETFs,” said S&P Capital IQ in a note out Tuesday.

Spotlight On PCY

Emerging markets bond ETFs, such as the PowerShares Emerging Markets Sovereign Debt Portfolio PCY, are catching investors' attention again as the dollar weakens and the hunt for yield remains strong.

Emerging markets governments and some corporations binge borrowed in dollars during the various versions of the Fed's quantitative easing programs. It looked smart as the dollar weakened against a plethora of developed and emerging currencies, but those emerging markets borrowers were caught off guard when the dollar started soaring several years ago.

PCY added $137 million in new assets last month and is in the upper echelon of PowerShares ETFs for assets added this year.

“The biggest overall asset gatherer in March was iShares MSCI Emerging Markets (EEM), a $25 billion ETF that swelled with the addition of $4.6 billion of inflows. EEM, which trades approximately 70 million shares on a daily basis with a tight $0.01 bid/ask spread and a 0.69 percent expense ratio, tends to be used primarily by institutional investors, who prefer it to other emerging market ETFs. The inflows in March erased the outflows the product faced in the first two months of the year,” said S&P Capital IQ.

Disclosure: Todd Shriber owns shares of VWO.