BlackRock fund loses $5B as emerging markets ETFs face churn

investmentnews.com:

Exchange-traded funds that buy emerging-market equities are undergoing a churn — and the biggest loser is the BlackRock Inc. fund that helped usher in passive investing to the asset class two decades ago.

Investors have withdrawn $5.4 billion from the iShares MSCI Emerging Markets ETF since July — of which $1.5 billion, or 8% of its assets, fled just this week alone. Combined with an equity selloff during this period, the fund’s assets have shrunk to the least since 2009. It’s now a $17 billion fund compared with $53 billion a decade ago.

ETF watchers say investors are turning away from broad-brush emerging-market funds that track benchmark indexes as they seek targeted exposure to specific countries, sectors and investment styles. The BlackRock fund, widely known as EEM, has become a victim of this trend, as it has been a virtual flagship of the asset class since 2003 and the first to be dumped when risk sentiment deteriorates.

“Traders look at EEM as an easy button for broad emerging-market exposure,” said Ben Johnson, head of client solutions at Morningstar Inc. “EEM is just that big red button on your trading desk that says I want to put this bet on or I want to take it off.”

Fund managers and analysts say EEM’s outflows have been deepening since 2018 because of its focus on large, benchmark-listed stocks at a time when some of the best investment opportunities came from smaller, newer companies in an expanding emerging-market universe. With long-term investors switching to funds that also offer small-cap opportunities — such as BlackRock’s own iShares Core MSCI EM ETF — EEM has been reduced to a domain of traders and hot money.

The fund’s capital losses contrast with its main rivals, which have hardly seen outflows