U.S. investors are increasingly favouring exchange-traded funds that focus on individual countries in 2024. They are moving away from multinational ETFs and looking towards other emerging nations that offer more promising growth prospects, rather than investing in China’s market.
U.S.-listed ETFs investing in Indian equities have experienced significant net inflows of nearly $2.7 billion in 2024. The iShares MSCI India ETF INDA, the largest India-related fund, has experienced a significant influx of $1.5 billion in net inflows so far this year. According to FactSet data, the fund has experienced a 5.6% increase over the past four months, while the iShares MSCI Emerging Markets ETF EEM has seen a 5.3% year-to-date advance.
Indian stocks have performed exceptionally well compared to other emerging-market equities in the past year. INDA has seen a significant increase of 24.4% over the last 12 months, while the broader EEM has only risen by 8.1% during the same period, as reported by FactSet data.
Neena Mishra, director of ETF research at Zacks Investment Management, has observed a significant increase in investor interest in India. This is primarily driven by the country’s strong economic growth and the inherent strengths of its stock market.
In 2023, India’s economy experienced a more rapid expansion compared to China, with a GDP growth of approximately 7.5% versus China’s 5.2% growth during the same period. In the past 12 months, the India Nifty 50 IN:NIFTY50, which is the benchmark index representing the weighted average of 50 of the largest companies listed on the National Stock Exchange, has experienced a significant surge of over 20%. In contrast, China’s Shanghai Composite Index CN:SHCOMP has faced a slump of 6% during the same period, as per FactSet data.
One of the reasons for the outperformance of India-related ETFs compared to emerging markets is the growing interest of major technology companies in the U.S. to consider India as an alternative supply-chain option to China. This shift is driven by increasing geopolitical tensions between Washington and Beijing, as highlighted by Mishra in a recent conversation with MarketWatch.
Investors are rapidly withdrawing from China
Hopes for a robust economic rebound in the world’s second-largest economy dwindled in 2023 due to increasing local government debts, sluggish consumer demand, and a struggling property sector. These factors have put a strain on the Chinese economy and its financial markets.
Global investors have reduced their exposure to China in recent times. The iShares MSCI China ETF MCHI experienced a 5% decline over the past year, whereas the iShares MSCI Emerging Markets ex China ETF EMXC showed a 14.3% growth during the same period, surpassing the 8.2% gain of the broader iShares MSCI Emerging Markets ETF.
Increased attention on Japan equities
U.S. investors who have previously shown confidence in Chinese stocks are now shifting their focus towards Japan equities, aiming to take advantage of the booming market while minimising exposure to foreign currency fluctuations.
Last week, the Japanese yen reached a new 34-year low against the U.S. dollar. However, this week it has rebounded due to concerns among traders that the Bank of Japan may have intervened to bolster the currency.
After years of grappling with deflation and a sluggish economy, Japan seems to have found its footing for sustainable growth in 2024. The Nikkei 225 JP:NIK, Japan’s benchmark stock index, has achieved numerous record highs this year, with a year-to-date increase of 13.8%. In comparison, the S&P 500 SPX has risen by 9.3% during the same period, as reported by FactSet data.
The iShares MSCI Japan ETF EWJ has seen a 6.5% increase in value so far this year, while the WisdomTree Japan Hedged Equity Fund DXJ, a currency-hedged ETF, has experienced a significant 23.7% surge year to date. In contrast, the iShares MSCI ACWI ex U.S. ETF ACWX saw a 5.7% increase during the same time frame. This ETF monitors a variety of non-U.S. equities from both developed and emerging markets, as reported by FactSet data.
The performance of U.S. markets has consistently surpassed global counterparts in recent years, maintaining a strong growth trend that has lasted for a decade in comparison to the rest of the world. Nevertheless, investors are now considering opportunities beyond the borders of the United States due to growing concerns over geopolitical tensions, persistent inflation, and overextended market valuations, according to Mishra. There is data indicating a growing interest in expanding investments beyond the United States. That’s why there is some interest in the single country ETFs,” she added.
Be cautious of the potential risks associated with investing in ETFs that are focused on a single country.
According to Mishra, investors should be cautious of the concentration risk that comes with adopting a more selective strategy when investing in non-U.S. equities, despite the notable outperformance in certain international markets.
According to her, some investors are more inclined to take risks and invest in single-country ETFs instead of broader emerging markets ETFs. However, for those who prefer a diversified approach, funds related to emerging markets or broad international ETFs would be a better option.
Here’s your weekly update on the best and worst performing ETFs based on FactSet data.
New ETFs
- Global X ETFs on Wednesday launched the Global X MLP & Energy Infrastructure Covered Call ETF MLPD and the Global X S&P 500 Quality Dividend Covered Call ETF QDCC. The funds seek to offer “diversified income” by holding and then writing call options on the Global X MLP & Energy Infrastructure ETF MLPX and the Global X S&P 500 Quality Dividend ETF QDIV, respectively, the company said in a press release.
- The TCW Group on Monday completed the conversion of two mutual funds into ETFs: the TCW Artificial Intelligence ETF AIFD, previously known as the TCW Artificial Intelligence Equity Fund TGFTX, and the TCW Compounders ETF GRW, previously known as the TCW New America Premier Equities Fund TGUSX.
- Tremblant Capital on Friday launched the Tremblant Global ETF TOGA, an actively managed fund that seeks to hold 30 to 50 positions in companies undergoing “disruptive consequential change” and durable long-term growth businesses, with an emphasis on large- and mid-cap companies, the firm said in a press release.
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