Billions Flood Active ETFs in Hunt for Cheap EM Stocks

As investors scour the globe for under-valued stocks, one increasingly popular destination is actively managed exchange-traded funds that focus on emerging markets.

In the $350 billion market for ETFs that invest in developing-nation assets, the holdings of only about 5% of funds are actively managed — rather than pinned directly to an underlying index, according to data compiled by Bloomberg. But those actively managed funds have lured in more than a third of new cash that’s flowed into the asset class over the past year.

“If ever there was a compelling case for a more systematic approach to active management, it’s now,” said Donald Calcagni, chief investment officer of Mercer Advisors and a buyer of active emerging-market ETFs. “Look at all the dislocations that are happening globally, at valuations, at how concentrated markets have become.”

Active EM ETF Flows Battle Passive Peers

The reasons for the shift toward emerging-market shares are plenty. Developing-nation stocks are trading at a discount of about 43% compared to their peers in the US, just shy of the biggest valuation gap on record, data compiled by Bloomberg show.

That chasm is a signal to some on Wall Street — including those with very few overseas investments — that developing-nation stocks are undervalued, offering an ideal moment to load up on the assets.

Investors have been pouring cash into ETFs that wager on emerging assets in a bid to take advantage of lower fees and avoid the logistics of cross-border trading. That momentum is reigniting the debate over whether investors can eke out stronger returns in nimble, active strategies compared to passive ones that are beholden to a benchmark.