Billions Rush into Emerging Markets: Active ETFs Take Lead in the Hunt for Undervalued Stocks

In a global quest for undervalued stocks, investors are increasingly turning to actively managed exchange-traded funds (ETFs) specializing in emerging markets.

Amidst the $348 billion market for ETFs targeting developing-nation assets, only a small fraction, approximately 5%, are actively managed rather than passively tied to an index, as per Bloomberg data. Nevertheless, these actively managed funds have captured over a third of the new capital inflow into the asset class over the past year and more than half in the previous month.

Donald Calcagni, chief investment officer of Mercer Advisors Investment Management, advocates for a systematic approach to active management, citing global dislocations, valuation shifts, and market concentration.

Emerging-market stocks are currently trading at a discount of approximately 43% compared to their US counterparts, signaling an opportunity for investors, according to Bloomberg data.

Patrick Maynor, head of equities at Trusted Capital Group, underscores the appeal of emerging-market stocks due to their lower valuations and diversification benefits. He points to the Avantis Emerging Markets Equity ETF (AVEM) as a successful investment, surpassing its benchmark by 3 percentage points since April 2023.

The majority of cash flowing into actively managed EM ETFs gravitates towards strategies managed by Avantis Investors and Dimensional Fund Advisors, renowned for their lower fees and track records of outperforming passive benchmarks.

Recognizing the demand, product issuers like Avantis have introduced new offerings to meet investor preferences, such as the Avantis Emerging Markets ex-China Equity ETF (AVXC), catering to those seeking more targeted exposure.

Despite concerns about the significant exposure to China in these funds, investors are attracted to the potential upside of emerging-market investments, even amidst market uncertainties.

In summary, the surge in investor interest in actively managed ETFs targeting emerging markets reflects a growing appetite for undervalued stocks and strategic investment opportunities in a dynamic global landscape.