Emerging Markets Most Crowded Trade Ever: 5 Hottest ETFs

According to the February survey of Bank of America Merrill Lynch (NYSE:BAC), emerging markets have been labeled as the “most crowded trade” on the Wall Street for the first time in history. This marks a sharp reversal from last month when fund managers said "short emerging markets" was the third most-crowded trade.

Behind The “Most Crowded Trade”

After being hit sharply last year, the enthusiasm in the emerging markets has been renewed by the Fed’s cautious stance that it is not in a hurry to raise interest rates this year. This has pushed the U.S. dollar down, pulling in more capital into the emerging markets. Per TrimTabs Investment Research, emerging markets equity ETFs had inflows of $3.5 billion, or 1.9% of assets, during the five trading days ended Feb 5, the biggest five-day inflow since April 2014 (read: EM Equities ETFs Off to a Great Start in 2019: Here's Why).

Hopes over the trade deal between the United States and China as well as stimulus in China’s economy have also raised the appeal for these stocks though global slowdown concerns remain an overhang. China’s central bank cut its reserve requirement ratio (RRR) for the fifth time early this year and also offered financial institutions $83 billion in liquidity as part of a wider economic stimulus later on. Additionally, the bank signaled more stimulus measures in the near term as the tariff war with United States is taking a toll on the world’s second largest economy.

Further, the positive developments in Brazil and Argentina led to spike in broad emerging market trades. This is especially true as Brazilian stocks have been flying higher on hopes of economic reforms after President Jair Bolsonaro took office on Jan 1 while the stock market in Argentina showed a strong rebound as the central bank’s tighter monetary policy, introduced late last year in an effort to curtail the peso's slide and curb inflation, has started to pay off (read: Best Performing Single-Country ETFs of January).

Rebound in oil price also supported the emerging markets. If these weren’t enough, the beaten down prices have made stocks targeting emerging nations compelling bets.

Hot ETFs in Focus

Given the encouraging fundamentals, we have highlighted some hottest emerging market ETF trades of this year. All these funds have gained about 8% so far this year and have a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares Core MSCI Emerging Markets ETF IEMG

IEMG is the most popular ETF play this year, pulling in about $4.7 billion in capital. It offers exposure to a broad range of 2230 emerging market securities, with each accounting for less than 4.5% of the assets. China takes the largest share at 29.4% while South Korea and Taiwan also receive double-digit exposure each. From a sector look, about one-fourth of the portfolio is tilted toward financials while information technology, communications and consumer discretionary round off the next three spots. The ETF has AUM of $57.4 billion and average daily volume of about 19.9 million shares. It charges 14 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. The fund is up 8.1% so far this year (read: 4 ETF Areas Getting All Love in Valentine Month).

iShares MSCI Emerging Markets ETF (NYSE:EEM) EEM

This product tracks the MSCI Emerging Markets Index, holding 950 stocks in its basket with each accounting for less than 5% of the assets. China, South Korea and Taiwan are the top three countries while financials, information technology, and communication constitute the top three sectors. EEM has accumulated nearly $2.3 billion in capital so far this month. It is the most-popular and widely traded emerging market ETF with AUM of $33.7 billion and average daily volume of more than 86.7 million shares. The fund charges 67 bps in fees per year from investors and has gained 8.5% so far this year. It has a Zacks ETF Rank #3 with a Medium risk outlook.

Vanguard FTSE Emerging Markets ETF VWO

This fund has gathered $2.1 billion in capital, bringing its total AUM to $61.1 billion. It holds 4700 stocks in its basket with none making up for more than 4.7% share. Chinese firms account for 33.7% of the portfolio while Taiwan and India take 14.1% and 12% share, respectively. The product charges 14 bps in annual fees and trades in heavy volume of 19.5 million shares. It has a Zacks ETF Rank #3 with a Medium risk outlook (see: all the Broad Emerging Market ETFs here).

SPDR Portfolio Emerging Markets ETF SPEM

With AUM of $2.5 billion, this product follows the S&P Emerging BMI Index and charges 11 bps in annual fees. Holding 1389 stocks in its basket, it is pretty spread out across components with none making up for more than 4.91% share. From a country look, China takes the largest share at 32.4% while Taiwan and India round off the next two spots. Financials takes the largest share at 26.5% share while consumer services, consumer discretionary and information technology are the top three sectors. SPEM saw inflows of $458 million this year and trades in average daily volume of 865,000 shares.

Schwab Emerging Markets Equity ETF (NS:SCHE)

This fund has gathered $215 million in its asset base, propelling its AUM to $5.3 billion. It tracks the FTSE Emerging Index, holding 991 stocks in its basket and none accounting for more than 5.6% of the total assets. The product is slightly tilted toward financials at 26.7%, closely followed by communication services (15.1%). Here again, China takes the top spot at 32.7% while Taiwan and India have a double-digit allocation each. The fund trades in average daily volume of 1.8 million shares and charges 13 bps in fees per year.

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