ETF Investors Flee Int’l Stocks

October 24, 2019

Single-Country Outflows
In addition to money flowing out of broad, higher-cost funds, investors have shunned single-country ETFs targeting unattractive areas.

The aforementioned EWJ has faced hefty outflows as Japanese growth remains mired below 1%, even with the loads of monetary and fiscal stimulus that has been thrown at the economy.

The iShares China Large-Cap ETF (FXI), which holds 50 of the largest Chinese stocks on the Hong Kong Stock Exchange, has been hit by the one-two punch of a slowing China and mass protests in the city of Hong Kong. FXI’s year-to-date outflows total $1.5 billion.

Meanwhile, the iShares MSCI Germany ETF (EWG) has been hit with outflows of $419 million as growth in Europe’s largest economy slows to a trickle—only 0.5%, according to IMF projections.

Interestingly, the iShares MSCI United Kingdom ETF (EWU) has bucked the trend, with net inflows of $390 million this year, despite ample Brexit uncertainty. Investors may be betting that a deal gets done and shares of U.K. companies will see a relief rally once the country officially leaves the European Union. 

Returns Lagging The US
Investors’ reluctance to embrace international equity ETFs this year hasn’t hurt their returns. The super-broad Vanguard Total World Stock ETF (VT) is up less than the S&P 500 this year—18.3%—even with a 56% weighting in U.S. stocks.

ETFs with no U.S. exposure have done worse. Year to date, the iShares MSCI EAFE ETF (EFA) is up 16.1%, the iShares MSCI Eurozone ETF (EZU) is up 17.7% and the iShares Emerging Markets ETF (EEM) is up 9.4%.

Taking a look at select single-country ETFs, the iShares MSCI Japan ETF (EWJ) is higher by 15.6%, the iShares MSCI Germany ETF (EWG) has returned 15.1%, the iShares MSCI United Kingdom ETF (EWJ) has climbed 13.2% and the iShares China Large-Cap ETF (FXI) is up by 6.6%.

These aren’t bad returns on an absolute basis, but they certainly lag what investors are getting in U.S. stocks. Moreover, U.S. stocks are near record highs, while most international equity indices are well off their all-time high levels.

While value hunters may consider an opportunity for international equity ETFs to outperform going forward, investors will want see a clear-cut path for fundamental improvement before the flows numbers turn around.  

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

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