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Volatile Emerging-Markets ETF Flows Mask Growing Allocations to the Developing World

In recent years, emerging-markets funds have come into the mainstream and have found a permanent home in many investors' portfolios.

Patricia Oey, 08/14/2013

Historical asset flow and Morningstar Investor Returns data show that investors tend to chase performance. Emerging-markets funds would seem to be particularly susceptible to performance-chasing given their pronounced volatility. For example, in 2008, the MSCI Emerging Markets Index plummeted 53% and then rallied 79% in the following year. 

Looking at the charts below, emerging-markets fund flows appear to rise and fall along with market performance. Chart 1 is a graph of the annual returns of the MSCI USA Index, the MSCI EAFE Index (an index of stocks in developed foreign markets), and the MSCI Emerging Markets Index. Chart 2 graphs the annual net flows into and out of three categories of funds--U.S. equity funds, foreign developed equity funds, and emerging-markets equity funds--as a percentage of total net assets invested in those funds at the start of the year. The funds in Chart 2 include both exchange-traded funds and mutual funds.

 

Chart 1: Annual Market Performance
Source: Morningstar Direct.


 

Chart 2: Annual Growth in Category Fund Assets From Asset Flows

Source: Morningstar Direct.


Patricia Oey is an ETF analyst at Morningstar.
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