A Catalyst For Emerging Markets ETFs

The slack May jobs report clearly is not derailing riskier assets, as stocks are soaring this month. So is oil, as crude hit $50 per barrel for the first time in 11 months on Tuesday. Emerging markets stocks and exchange-traded funds are also getting a lift.

It is easy to understand why. Although developing markets stocks have better withstood U.S. interest rate speculation this year than in either of the past two years, many investors still view the asset class vulnerable to hawkish moves by the Federal Reserve. So it is to the benefit of ETFs such as the Vanguard Emerging Markets Stock Index FdiShares MSCI Emerging Markets Indx (ETF)

The Benefit Of Maintaining Interest Rates

Bond markets are reducing the odds of the Fed boosting rates this month and the odds of that scenario coming to pass in July are also declining. Investors are responding by racing back into funds such as VWO and EEM, the two largest emerging markets ETFs by assets.

Fridays disappointing non-farm payroll number was seen by the markets as a catalyst for a continuation of the current status quo regarding US interest rates, which in turn quieted some of the bearish sentiment seen in emerging market equities. ETF fund flows have reflected this change of mood as emerging market funds registered over $1bn of inflows in the two days since Friday mornings announcement from the US Bureau of Labour Statistics, said Markit

Rebounding currencies and commodities prices have lifted emerging markets ETFs. Those performances have been enough to encourage investors to enter ETFs like EEM and VWO after a couple of years of pulling money from those funds.

On The Rebound

For the five years ended 2015, 2012 was the only year in which EEM and VWO finished higher. That track record combined with an assortment of other issues, including tumbling commodities prices and currencies, have prompted some well-known investors to speculate the emerging markets slide is not over. However, recent price action says otherwise.

Short sellers, which had added to their positions in many of the largest emerging market ETFs in recent weeks, are also paring back their trades as the asset class surges ahead of domestic US equities. Short interest in the EEM ETF had surged by four-fold in the weeks since the emerging trade momentum fell out of favour. 80 million shares of the EEM ETF were shorted at the end of last month, representing over $2.7 billion of short position, added Markit.

Disclosure: Todd Shriber owns shares of VWO.