Interest in emerging market ETFs is exploding. But considering how illiquid and inexpensive these stock funds are to own, it’s not all that surprising.

As pointed out in our recent Q&A with emerging markets whiz Brad Durham (see story here), ETFs now have jumped to capture nearly a third of the assets in funds focused on those countries.

His breakdown of the world’s money flows between ETFs and mutual funds really makes me question the widely held view that investors coming into ETFs are largely ex-stock pickers.

Many fund industry veterans have been contending for years that ETFs’ gains aren’t coming at the expense of mutual funds. Perhaps that is true. Each year, I’ve taken a look at fund flows between active mutual funds, index mutual funds and ETFs. The last one, done in 2008, showed that ETFs were by far the percentage growth leaders.

But over an extended period, such research has reported that index mutual funds were also rising, whereas active mutual funds were on the decline in the short-term and have already hit a plateau (looking back over the past decade).

In such dicey times, it only makes sense that active fund managers are having particularly tough times stock picking in smaller global markets. I’d like to point our readers to another new piece of research by Credit Suisse’s Alex Redman. He has been gracious enough to let us reprint his latest study, which is the most thorough I’ve seen to-date, in the Research section of IndexUniverse.com.

One of the more intriguing aspects of the research piece is Redman’s analysis providing more in-depth reasoning behind why more investors are turning to emerging markets ETFs. He notes that “a vast majority of emerging market ETFs are aligned along regional or country geographies rather than sectors (in contrast to developed market ETFs, which are predominately sector oriented).”

Note: Funny he should mention that … today a third emerging markets sector ETF was launched. (You can read about that story here.)

“This will serve to self reinforce the tendency for active funds to invest by country rather than by sector and may significantly increase intra-country stock correlations rendering country selection (a top down macro approach) increasingly as important as stock selection in emerging market investing,” Redman noted.

He also found that pan-emerging market equity funds as a whole have attracted net inflows for all previous 10 weeks (the research piece is dated July 17). The only other occasion in this decade such a flow pattern has taken place, Redman adds, has been through the week of Nov. 7, 2007. He has also seen a record positive deviation in the MSCI EMF index above its 10-week moving average.

“We‘d caution that typically from these levels inflows and price momentum undergo a strong reversal,” wrote Redman.

But that’s just a tidbit. Enjoy …

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