ETFs that invest in emerging market bonds have seen inflows of $13.5 billion in the first half of this year, despite worries about central bank policy.
While 2016 saw a gain of $11 billion over the full 12 months in EM debt ETFs, 2017 has already smashed that record.
Inflows so far are equivalent to more than two-fifths of all flows into emerging market bond active funds, found EPFR.
At BlackRock, the largest fund manager in the world, EM bond ETFs gained more than $10 billion between January and June, more than two times the amount taken in by the company’s active managed EM debt funds.
The record numbers come despite concerns that many of the world’s major central banks are turning to tighter monetary policy, which typically waters down demand for fixed-income securities.
But with recent outflows, as shown by TrackInsight, more investors appear to be focused on central bank action and an increase in Treasury yields.
In the last week, more than $1 billion was wiped off emerging market debt ETFs, pushing overall flows to the asset class at a year-to-date loss of 1.8%, after gains of 4.4% to mid-April.
2017 also stands out in stark contrast to every year since 2007.
In 2013, there were net outflows to the asset class during the “taper tantrum” as investors dumped their holdings in panic as the US Federal Reserve said it would start tapering off quantitative easing.
Inflows raise doubts over ETF liquidity
Inflows have raised concerns over ETF liquidity if investors decide to pull their cash. What happens if EM fundamentals, which appear positive at the moment, according to experts, take a turn for the worse?
But Brett Pybus, product strategist at iShares, said ETFs enable price discovery in an opaque market.
“People say ETFs will be forced sellers [in a falling market] but that’s not the experience,” he told the Financial Times, explaining that ETFs are more likely to give their bonds to authorised participants to receive holdings in kind and adjust the portfolio than sell the assets for cash.
Handsome returns for EM ETFs
So far investors have been rewarded, with about 6% returns for EM dollar-denominated bonds in the first six months of the year and 10% returns for local currency bonds.
Although those dipping a toe in the water over the past month would have been burnt, with negative returns of close to 4%.