Emerging Market ETFs Surge Amid Fed Rate Cut Bets and Middle East Tensions

Investors have poured over $3.1 billion into emerging market ETFs in June, with the iShares Core MSCI Emerging Markets ETF receiving over $1.2 billion in new cash last week. The surge is driven by easing Middle East tensions and rising bets of Fed rate cuts this year. Emerging market ETFs are benefiting from improved risk sentiment, according to Brendan McKenna, an emerging market strategist at Wells Fargo.

Investors have poured over $3.1 billion into emerging market ETFs in June, with the iShares Core MSCI Emerging Markets ETF (IEMG) receiving over $1.2 billion in new cash last week. The surge is driven by easing Middle East tensions and rising bets of Fed rate cuts this year. Emerging market ETFs are benefiting from improved risk sentiment, according to Brendan McKenna, an emerging market strategist at Wells Fargo.

The iShares Core MSCI Emerging Markets ETF (IEMG) saw its strongest monthly influx since January 2023, registering $2.95 billion in inflows in June. This reflects a significant shift in global positioning, with investors seeking relative value and macro tailwinds beyond U.S. assets. The U.S. Dollar Index (DXY) dropped to its lowest level in over three years, further fueling the interest in emerging markets.

Emerging market stocks are on track for a 5% monthly gain in both May and June, setting up the strongest two-month performance since late 2022. This performance is notable given that emerging markets have underperformed U.S. stocks by 70% since 2013, yet they are up about 10% year-to-date—on track for their best year since 2017.

Bank of America's chief investment strategist Michael Hartnett sees a powerful confluence of global forces working in favor of emerging markets. He notes that the rise of artificial intelligence is increasing demand for the raw materials that many EM countries produce, while a weakening U.S. dollar is removing one of the main barriers to capital inflows. With EM equities still trading near multi-decade lows relative to U.S. stocks, Hartnett suggests the current setup makes an “easy allocation decision.”

The Federal Reserve's monetary policy decisions are also influencing investor sentiment. With the Fed signaling potential rate cuts in the last half of 2025, traders and consumers stand to benefit. Lower rates typically weaken the dollar and boost demand for riskier assets, such as equities, but they also impact bond market prices. For example, if the 10-year yield drops from 4.3% to 3.8%, the cost of a $1,000 Treasury note could increase by approximately $40, depending on the note's duration and market conditions.

Seasonal patterns in July also offer opportunities for investors. Historical research from Moore Research Center, Inc. (MRCI) highlights a tendency for Treasury prices to rise and yields to fall in July. This pattern holds across the 5-year, 15-year, and 30-year seasonal patterns, implying that the fundamentals during this period have been relatively consistent, driven by market dynamics and investor behavior.

In summary, the strong inflows into emerging market ETFs in June reflect a combination of geopolitical tensions easing, Fed rate cut expectations, and improved risk sentiment. Investors are positioning themselves to take advantage of these trends, with the iShares Core MSCI Emerging Markets ETF leading the way.

References:
[1] https://fundresearch.fidelity.com/mutual-funds/view-all/316146331?type=o-NavBar
[2] https://www.etf.com/sections/daily-etf-flows/ivv-attracts-12b-sp-500-hits-fresh-record
[3] https://www.benzinga.com/news/25/06/46171994/emerging-markets-stocks-dollar-outlook
[4] https://www.legacygrain.com/news/story/33123478/lower-interest-rates-in-the-3rd-quarter-opportunities-for-traders-and-consumers