Last week, ETFs.com’s weekly flows article showed that this year’s pace of inflows had surpassed that of last year. A total of $211.7 billion flowed into U.S.-listed ETFs as of Thursday, Oct. 17, more than the $201.8 billion at the same time in 2018.
While demand for U.S. fixed income ETFs has been strong all year long, inflows were able to surpass the pace of last year thanks to the interest in U.S. equity ETFs. The asset class has picked up $83.6 billion in fresh cash this year, just a bit below the $88.5 billion of inflows they had at the same time a year ago.
Stocks Sit Near All-Time Highs
It makes sense that investors would be adding to their U.S. stock ETFs. Despite a multitude of head winds—from trade wars to slowing economic growth to sagging corporate earnings—the S&P 500 stands just 1% off its all-time high, returning 21.8% on a year-to-date basis.
The U.S. economy continues to outperform its developed market counterparts, with growth in the first half of the year clocking in at 2.5%, and unemployment in October falling to 3.5%, a 50-year low.
That compares favorably with Europe, which is projected by the International Monetary Fund to grow 1.2% this year; and Japan, which may grow only 0.9%. The IMF expects the U.S. to grow by 2.4% for the full year.
Year-To-Date Net Outflows
It’s no wonder then that investors have been plowing money into U.S. equity ETFs and not international equity ETFs. The latter segment had actually seen net year-to-date outflows of $1.3 billion as of last week, compared with net inflows of $40.8 billion at this same time a year ago.
Though several low-cost international equity ETFs have seen sizable inflows this year—including the iShares Core MSCI EAFE ETF (IEFA), the Vanguard Total International Stock ETF (VXUS), the iShares Core MSCI Total International Stock ETF (IXUS), the iShares Core MSCI Emerging Markets ETF (IEMG) and the Vanguard FTSE Emerging Markets ETF (VWO)—that’s been offset by equally large outflows from higher-cost funds.
Top Int’l Equity Inflows
|Ticker||Fund||YTD Net Flows ($M)|
|IEFA||iShares Core MSCI EAFE ETF||7,478|
|VXUS||Vanguard Total International Stock ETF||4,483|
|IXUS||iShares Core MSCI Total International Stock ETF||3,594|
|IEMG||iShares Core MSCI Emerging Markets ETF||2,824|
|VWO||Vanguard FTSE Emerging Markets ETF||2,317|
|SCHF||Schwab International Equity ETF||2,018|
|EFAV||iShares Edge MSCI Min Vol EAFE ETF||1,580|
|ACWV||iShares Edge MSCI Min Vol Global ETF||1,440|
|BBCA||JPMorgan BetaBuilders Canada ETF||1,398|
|BBEU||JPMorgan BetaBuilders Europe ETF||1,015|
Top Int’l Equity Outflows
|Ticker||Fund||YTD Net Flows ($M)|
|EFA||iShares MSCI EAFE ETF||-9,720|
|EEM||iShares MSCI Emerging Markets ETF||-5,469|
|EWJ||iShares MSCI Japan ETF||-4,423|
|VT||Vanguard Total World Stock ETF||-1,738|
|EZU||iShares MSCI Eurozone ETF||-1,656|
|ACWI||iShares MSCI ACWI ETF||-1,605|
|FXI||iShares China Large-Cap ETF||-1,514|
|DXJ||WisdomTree Japan Hedged Equity Fund||-1,459|
|VGK||Vanguard FTSE Europe ETF||-1,377|
|ACWX||iShares MSCI ACWI ex U.S. ETF||-1,263|
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.