Emerging Market ETFs Lead Q3 Fund Flows

Emerging markets have returned to the forefront of investors’ radar screens over the last two months, as recent data shows money flowing into these international ETFs.

The combination of strong relative performance in undervalued regions of the globe has been a recipe for a comeback in emerging markets that may still be in its infancy.

From the beginning of the quarter through August 27, the iShares MSCI Emerging Market ETF EEM and Vanguard FTSE Emerging Market VWO have seen a surge of more than $4.1 billion in combined assets. This puts them in two of the top four ETFs for net inflows over the last two months.

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During that same time frame, VWO has gained 5.29 percent versus just 2.28 percent for the domestic-oriented SPDR S&P 500 ETF SPY. In addition, broad-based emerging market ETFs are now leading all major large-cap U.S. indices on a year-to-date basis.

Considering developing nations such as China, Brazil, Russia and India have been lagging red hot U.S. stocks for years now, a true breakout in relative strength could be sustainable for some time. Blackrock recently issued a note that urges investors to consider reentering emerging market equities after years of investors being under-allocated to these stocks.

India in particular has been on fire in 2014 as the WisdomTree India Earnings ETF EPI has gained 30 percent this year. This country has benefited from a new prime minister that is considered by many to be a strong economic and fiscal leader.

EPI focuses on 170 stocks based in India using a fundamental screen to weight the constituents according to earnings in its prior fiscal year. The end result is a diversified basket of equities spread across multiple sectors with positive earnings characteristics. This ETF has $2 billion in total assets and charges an expense ratio of 0.83 percent.

It's also worth noting that the iShares MSCI Hong Kong ETF EWH has come on strong over the last two months and has attracted $1.1 billion in new inflows as well. This country is not technically an emerging market nation but is closely tied with China in many financial aspects.

Disclosure: At the time this article was published, the author was long VWO.