Performance Chasing in Emerging Market Bonds

ETF.com reports extremely large inflows into Emerging Market Bond ETFs relative to their asset base just as performance has been extremely strong. One wonders what happens when the markets reverse and the outflows begin.Many emerging markets have poor liquidity so large scale sales could create a vicious circle of further declines and more sales.

From Etf.com

Emerging Market Bond ETFs In Vogue

This is a pocket of fixed income that was bruised and battered following last November’s U.S. presidential election due to concerns about inflation, higher rates and the possibility of a strong dollar under the new administration.

But in 2017, emerging market bond ETFs have staged quite a turnaround. A recent Columbia Threadneedle survey gauging investor sentiment toward emerging markets in general showed a “significant” uptick in how investors feel about the region—up 36% from the last quarter of 2016, and up 72% from the end of 2015

The inflows relative to asset size are mind boggling and one can only wonder what will happen to those bond markets..if the sales begin

• iShares JP Morgan USD Emerging Markets Bond ETF (EMB), the largest ETF in the segment, with $11.7 billion in total assets, has attracted $3.3 billion in net creations so far in 2017.

( a 28% increase in assets over 8 months)

• PowerShares Emerging Markets Sovereign Debt Portfolio (PCY), with $4.7 billion in total assets, has gathered $786 million this year

   16.7% increase in assets    

• VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC), with $4.1 billion in total assets, has gathered more than $1.4 billion in fresh net assets.

34% increase in assets

• Vanguard Emerging Markets Government Bond ETF (VWOB), with $1.0 billion in total assets, has attracted $95 million in net inflows.

95% of the funds assets raised over the period

• iShares Emerging Markets High Yield Bond ETF (EMHY), with $515 million in total assets, has raked in $403 million in net creations year-to-date.

 a 78% increase in assets in the riskiest part of the emerging markets bond market

Furthermore as the article notes:

The five largest EM bond ETFs have seen solid net inflows in 2017—and represent only a quarter of the number of emerging market bond ETFs in the market today.

The article here points out some issues that could affect investors in emerging market bonds should a large selloff begin and liquidity is reduced.