March 20, 2020 / 3:21 PM / 20 days ago

UPDATE 1-Market rout rips $4.2 bln from emerging debt ETFs over last week -EPFR Global

(Adds detail, context, quotes)

By Tom Arnold

LONDON, March 20 (Reuters) - Investors pulled $4.2 billion out of emerging market debt exchange-traded funds over the last week, withdrawing faster than from other funds and amplifying the impact of the recent market rout for more fragile countries with higher ownership by ETFs.

Exchange-traded funds have piled into emerging markets hard currency credit in recent years, now accounting for around 18% of overall holdings and with a significant chunk of the debt issued by the likes of higher-yielding credit like Angola, Pakistan, Bahrain and Jordan.

But investors have piled out of those funds at a greater rate in recent weeks. Outflows from emerging market-focused ETFs reached 6.3% of total assets in the week to Wednesday compared with $1.9 billion the week before.

Outflows from equivalent non-ETFs in the week to Wednesday were $14.5 billion, or 3.7% of total assets, EPFR Global data showed. ETF outflows as a percentage of total holdings within emerging market debt were roughly double those of non-ETFs in the previous two weeks of the market chaos.

“The ETF exposures simply exacerbate an existing situation. We know that investors will reduce high yield exposures first, and those bonds tend to have higher ETF ownership so it creates a lot of pressure,” said Andrew MacFarlane, in emerging markets credit strategy at Bank of America.

Angola, which has one of the larger holdings by exchange-traded funds at around 7% of total ownership, had suffered strongly, MacFarlane said, adding that also reflected its exposure to oil prices as an energy producer.

Oil prices have more than halved since the start of the year, falling to around $30 a barrel in the wake of a price war between Saudi Arabia and Russia.

Angola’s bonds are down 45% over the past month, while Jordan and Pakistan’s bonds have tumbled around 25%.

ETFs had a higher sensitivity to price performance of the underlying benchmark, intensifying position build-ups in good times and putting additional pressure on outflows during bad times, noted Trieu Pham, EM Sovereign Debt Strategist at ING.

“With outflows dominating, this implies pressure on issuer curves that have a higher ETF ownership,” he wrote in a note.

While the outflow has hurt emerging markets, it has also caused pain for some ETF investors. With many ETFs’ market prices diverging from the value of their underlying market holdings due to a liquidity squeeze, investors wanting to offload any significant holdings are having to sell at a discount of up to several percentage points to the underlying asset.

“What we’re seeing is the unforeseen consequences of the rise of ETFs,” said Peter Marber, chief investment officer at active asset manager Aperture Investors. “This is something you have to deal with as everyone is running for the door. Anyone who wants to get out of these funds during times of stress often has to take less than the net asset value.” (Reporting by Tom Arnold, editing by Karin Strohecker and Hugh Lawson)

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