A swing factor that could be keeping EM flows up is opportunistic traders. There is a school of thought that the only way to make money in emerging markets is by trading, not investing. Critics of the long-term buy-and-hold EM philosophy will point to the fact that over the past decade, the MSCI Emerging Markets Index has produced nothing for investors. That argument can be flipped by the fact that emerging markets are by nature more volatile than developed markets, and over the past 15 years EM has produced double-digit returns.
Colas said in a recent research note that the EM index doubled in two years after its 2009 lows, and from the start of 2016 to January 2018, it rose by just over 60 percent. That led him to the conclusion that EM works best as a trade — for investors willing to consider a one- to two-year period as a trade — "when the global economy is either recovering from a crisis (2009–2011) or set to accelerate (2016–early 2018). Otherwise, they can be frustrating "economy of the future" investments.
The trade vs. buy debate is far from decided, and one ETF flows figure that stands out this year is the iShares MSCI Turkey ETF (TUR). Turkey, which precipitated current fears of an EM contagion, has positive flows this quarter of over $200 million and is positive for the year, even as the Turkey ETF is down 34 percent this quarter and over 50 percent this year. For the year, the MSCI Emerging Markets Index is down about 9 percent and the FTSE Emerging Markets Index is down about 10 percent.
There may be at least one sign that self-directed investors are more skittish, at least on the margins. While the iShares main EM stock ETF has seen continued strong flows, the Vanguard FTSE Emerging Markets ETF (VWO) has experienced outflows of near-$600 million in this quarter. "Many advisors use iShares core ETFs as building blocks, whereas Vanguard remains very popular among 'do-it-yourself' investors," Mishra said.
The MSCI EM index has also done better than the FTSE index used by Vanguard. Since the start of 2017, VWO has gained about 20 percent,whereas IEMG and EEM are up more than 25 percent, according to Zacks.
Over the past month, all three have gained assets (though minuscule for VWO), but suggests that maybe longer-term focused investors are willing to step in and buy the dip now.
Boneparth said there is ultimately only one way to test the theory that long-term investors are proving to be wise and will stick to their guns. "I hope that doesn't happen," he said.