European ETF investors are increasing their risk appetite by rotating out of short-duration government bonds into emerging markets.

According to data from Ultumus, two of the top 10 European-listed ETFs to see the most inflows in the week to 25 September were emerging market strategies.

The $6.1bn iShares J.P. Morgan EM Local Govt Bond UCITS ETF (IEML) and the $298m iShares MSCI EM ESG Enhanced UCITS ETF (EDM2) saw inflows of $328m and $139m, respectively.

Meanwhile, there were also strong inflows for the $3bn Xtrackers MSCI Emerging Markets UCITS ETF (XMME) with investors pouring $120m in the same week.

This could be a sign investors are more confident the rebound in the global economy while inflows into IEML show the collapse in bond yields in Europe and the US is pushing investors into emerging market debt.

Yacov Arnopolin, emerging markets debt portfolio manager at PIMCO, told the Wall Street Journal: “Emerging markets continue to look attractive and cheap versus developed markets.

“We are back to yield starvation, the same yield starvation we experienced before Covid-19.”

Highlighting major differences between Europe’s two largest local currency emerging market government bond ETFs

Furthermore, there were outflows for a number of short-duration government bond ETFs highlighting the risk-on mood among European investors.

The $7.2bn iShares $ Treasury Bond 1-3yr UCITS ETF (IBTS) saw outflows of $187m, the sixth highest across all Europea-listed ETFs, while investors withdrew $132m from the $1.2bn SPDR Barclays 1-3 Year Euro Government Bond UCITS ETF (GOVS).

Jean Boivin, head of the BlackRock Investment Institute, commented: “The reopening of economies is a major driver of trade revival.

“The rebound has been led by China thanks to its early emergence from lockdowns. Increased demand for medical equipment also helped.

“Trade tensions have been steady, but weaker Chinese imports from the US could be a source of political tension as the US election nears.”

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