Catch the QE3 wave as emerging markets led by Brazil dominating again

Trading volume in BRIC ETFs has sky-rocketed [pdf] after the announcement of QE3. The iShares MSCI Emerging Markets Index ETF (EEM, quote) traded 90mm a day last Thursday and Friday compared to a daily average of 40mm per day over summer.

Image courtesy Fabiana Guedes: http://www.sxc.hu/profile/fareguedes

Brazil: it's getting hot out here

Citigroup analyst Stefanie Stavri is rejoicing in the $3.3 billion of U.S.-listed emerging markets ETF inflows:

“This compares to a mere $375 million inflows last week and is the largest week of inflows since our ETF screen began in January 2011. The last time we observed comparable inflows was on the week of the 8th of February 2012 ($3.098 billion). We can only describe this as a full on post-QE3 beta chase.”

Last weeks ETF creation tells you investors are following our view, which is that emerging markets will outperform, and that the BRICs may be the best place to find underperformance that has fundamental reasons now to perform.

I talked about four BRIC stocks set to roar back on CNBC on Monday this week.

I have been all over Brazil (EWZ, quote) as a place to find the winds of policy change paying dividends. While bullish inflows can be seen pretty much across the board, Brazil has to be singled out, as expected, as the biggest beneficiary of this ‘risk on’ trade, accounting for 32% of this week’s figure (global emerging markets and country indices combined). We have been aggressively pushing upside trades on this country in the run up to, and post-QE3 announcement.

Stavri explains that there have been absolutely massive creations observed on EEM and the Vanguard MSCI Emerging Markets ETF VWO (quote), with inflows totalling $2.3 billion. There’s open interest on the U.S.-listed outstanding emerging markets ETF universe, which now stands at an all time high of $133.7 billion. VWO is also at record levels of open interest

Unsurprisingly the other BRIC countries also saw big creations: China (+$102 million), Russia ($41 million) and Taiwan ($54 million), though India to a lesser degree given its more defensive nature, says Stavri.

It’s also worth noting the juxtaposition between Russia’s big inflows and the South African and Turkey ETFs, which are flat to slightly up on the week, again proving investors have chased after the higher beta (underperforming) markets, at the expense of the more defensive (outperforming) markets year to date.

We now stand at $6.7 billion of inflows year to date.