Emerging market debt ETF suffers worst ever daily outflows


An emerging market debt ETF suffered its largest daily outflows since launch this week as markets nervously react to the potential of a US Federal Reserve rate hike later this month.

The $6.3bn iShares JP Morgan $ Emerging Markets Bond UCITS ETF saw $171m leave the fund on Tuesday, in contrast to regular daily inflows throughout the year.

IHS Markit research analyst Simon Colvin says emerging market bond ETFs are on track to see their streak of inflows interrupted this week with $308m of outflows so far. Last week, emerging market bonds saw $118m of inflows.

However, Colvin argues the iShares outflows should be taken in context as it is only one fund and emerging market bond ETFs, which includes 50 funds, have enjoyed $12.6bn of inflows in the year to date.

The previous largest inflows to the ETF category were $8.4bn in 2008 for the full year.

Colvin says while emerging bond funds have faced a challenging four or five days, it “doesn’t hide the fact they’ve been arguably the most popular bond trade this year”.

As well as developed market central bank activity, Colvin says there could have been an element of profit-taking from this week’s outflows.

Nerves in emerging markets follows jitters in developed markets around the globe. The S&P 500 dropped 2.45 per cent last Friday following hawkish comments from US Fed officials, with the FTSE following when it opened the following Monday.

Head of iShares EMEA investment strategy Wei Li says they believe emerging markets could withstand the “gentle rate hike path” that markets are currently pricing in.

Li says while emerging markets may come under pressure in the short term due to its sensitivity to the dollar, many improvements in the region are structural in nature.

This includes improvements in current accounts, structural reforms in India and China, and the turnaround of corporate earnings.

Li adds: “ETF flows are a good pulse for market sentiment, because they allow investors to express their views on sectors – both positive and negative – in a quick and efficient way.”

The iShares fund’s previous highest outflows had been in October 2015 and February 2016, when the fund lost $75m in outflows on both days.

Record daily inflows for the fund all came in this quarter, with the fund attracting daily inflows of $226m and $146m in July, followed by $139m at the end of August.

The fund has returned 14.4 per cent year to date.