What to watch in EMs even as China flounders

investmentnews.com:

Traders in the $325 billion industry for emerging-market exchange-traded funds are shifting cash toward strategies that focus on brighter spots in the developing world as China’s economy stumbles.

Actively managed ETFs — especially those with exposure to India’s world-beating growth and Latin American stocks — have lured nearly half a billion dollars over the past month, according to data compiled by Bloomberg on US-based funds.  At the same time, investors have yanked $3.5 billion out of passive, China-heavy strategies.

While ETFs have risen in popularity as an easy way to access hard-to-reach corners of financial markets, investors in passive vehicles are contending with the drawbacks of a fixed strategy. The rotation to active funds is evidence that everyone — from mom-and-pop traders to professional asset managers — are starting to realize the scope of Beijing’s struggle to deliver on its promised post-Covid growth. 

“You don’t want to brainlessly or mindlessly follow an index, right?” said Donald Calcagni, chief investment officer of Mercer Advisors Investment Management. “It’s an opportunity to rethink our emerging-market allocations and take a more flexible approach to how we think about geographical diversification.”

Traders withdrew more than $2 billion in August from the $21.6 billion iShares Emerging Markets ETF, one of the biggest US-based ETFs that focused on broad developing economies. The fund allocates about a third of its capital into China. Meanwhile, a BlackRock ETF investing in emerging markets outside China has garnered $945 million this quarter alone, its biggest inflows since inception.

It’s a major withdrawal, especially as investors pour cash into a similar fund that excludes Chinese assets