Small Size of Emerging Markets Could Lead to Trouble in Bear Market

6/22 - "We are sometimes asked why emerging markets are so much more volatile than developed markets. The answer is that, due to their relative size, money flows between them cause most of the volatility effect."

"Today, the developed markets free-float (represented collectively by VTI, EWC and EFA) is about nine times the size of the emerging markets free-float (represented by VWO). Within the total equity allocation of all investors, an increase or decrease in the developed markets allocation will show up as a magnified opposite change in the emerging markets allocation."

"The greater the supply-demand pressure, the greater the degree of price change.

Considering the current 9:1 developed-to-emerging markets ratio, if the current bear market causes collective investors to become more risk averse and to significantly reduce their emerging markets exposure in f...