BlackRock's ETF might suffer significant losses as emerging markets decline

 BlackRock's ETF might suffer significant losses as emerging markets decline

Exchange-traded funds that invest in emerging-market stocks are changing, and the fund from BlackRock Inc. that helped introduce passive investing to the asset class two decades ago is the biggest loser.

The iShares MSCI Emerging Markets ETF has seen investor withdrawals totaling $4.6 billion since July, with $1 billion, or 6% of its assets, leaving in just the last five days. The fund's assets have decreased to the least since March 2020 due to a combination of a selloff in equities prices during this time. Compared to $53 billion ten years ago, the fund is currently $17.7 billion.

According to ETF observers, investors are moving away from broad-brush emerging-market funds that replicate benchmark indices in favor of specialized exposure to certain nations, industries, and investment philosophies. Due to its status as the asset class's virtual flagship since 2003 and its history of being the first to be sold off when risk sentiment declines, the BlackRock fund, commonly referred to as EEM, has fallen victim to this trend.

Ben Johnson, head of client solutions at Morningstar Inc., stated that traders view EEM as an easy button for broad emerging-market exposure. EEM is just that large red button on your trading desk that indicates whether you wish to place or remove a wager.

Because of its emphasis on large, benchmark-listed corporations at a time when some of the finest investing opportunities came from smaller, fresher companies in an expanding emerging-market universe, fund managers and analysts claim that EEM's outflows have been intensifying since 2018. EEM has been reduced to the purview of traders and hot money while long-term investors have moved to funds that also provide small-cap prospects, such BlackRock's own iShares Core MSCI EM ETF.

Contrasting with its primary competitors, which have scarcely had withdrawals throughout this year's selloff, the fund has suffered capital losses. IEMG, another name for BlackRock's core EM fund, has received net inflows totaling around $3.7 billion so far this year. Only one day of withdrawals occurred in 2023 for the $70 billion Vanguard FTSE EM ETF, or VWO, and inflows have already started to resume.

However, certain carefully chosen country-specific ETFs where investors see promise for economic growth are already seeing a revival of inflows, despite a third quarter of falling emerging-market stocks. Brazil and India are two instances.

China Effect

ETFs having significant exposure to China have been hampered by a $1 trillion stock market decline in the country, which was driven by technology firms. Up to 27% of EEM's assets are invested in Chinese companies, which may cause investors who aren't optimistic about the second-largest economy in the world to stop investing. Inflows of $677 million have been made to BlackRock's fund that invests in emerging markets outside of China over the last two months.

BlackRock responded to inquiries through email with, "iShares has more than 1,300 ETFs to serve the broadest spectrum of clients - asset owners, asset managers, wealth, and individual investors. EEM is one of the most liquid emerging markets exchange-traded funds in the world, allowing investors to quickly access and voice their opinions on this market sector. 

This year, smaller-capitalization companies have outperformed large-capitalization stocks, continuing a pattern that began in March 2020. Since then, tiny caps have given investors in emerging markets a return of 111% as opposed to 24% for their larger counterparts.

Since the end of July, emerging-market stocks have been declining due to rising US yields and China's economic troubles, but the EEM ETF has its own peculiar characteristics that have made the pain worse, such as the expense of owning it.

The expense ratio of the fund is 0.69%, which is much higher than that of IEMG and VWO. Investors might be growing more cost-conscious as markets in emerging countries underperform those in the US.

Since July, emerging-market stocks have lost $1.66 trillion in market value, and a third consecutive annual loss is imminent. The week ended September 29 saw $612.4 million leave US-listed emerging-market ETFs.