[Editor’s note: The year is still young, but there are already some interesting ETF performance and demand trends in 2021. As February wrapped up, we’ve taken a look at three areas that stand out. Today: international equity ETFs. (Also, read: Hot ETF Stories This Year: #1 Blockchain and Hot ETF Stories This Year: #2 Marijuana.)]
The last article in our short series centers on a strong demand trend we are seeing in ETFs this year; namely, the appetite for international equity ETFs.
As a segment, foreign stock equity funds have now attracted more assets than any other asset class in 2021, including U.S. equity.
Investors have poured about $62.5 billion into international equity ETFs, which accounts for almost half of the $154 billion total U.S.-listed ETF creations year to date. That total is also outpacing net asset creations in U.S. equity funds this year—a notable trend for anyone who believes in the power of home-base bias.
What’s interesting about this demand is that the story here isn’t about just any ETF in this massively diverse and big segment. Outside of the hugely popular global equity ETF ARK Innovation ETF (ARKK), which sits at the No. 4 spot among top asset gatherers and is a big growth fund, demand is seen across some of the most value and cyclical plays.
That’s because among the top ETF creations, you’ll find the iShares MSCI EAFE Value ETF (EFV) leading the asset haul. EFV has taken in almost $4 billion in net inflows this year. The fund searches the developed ex-U.S. universe for value stocks based on metrics such as book to price ratios, earnings to price, and dividend yields.
Companies like Novartis, Toyota, Unilever and HSBC lead allocations in this 529-holding portfolio.
(Use our stock finder tool to find an ETF’s allocation to a certain stock
At a glance, here’s what the portfolio looks like from a geographical and sector perspective:
Demand for value stocks isn’t entirely new. We saw it pick up steam in late 2020, and in the U.S., not only demand but performance made a showing. Funds like the iShares Russell 1000 Value ETF (IWD) hit multiweek highs in late February.
EFV is a value fund looking for value stocks outside the U.S., where valuations are already generally seen as attractive, given the strong bull market in U.S. stocks over the past several years.
The portfolio has a weighted P/E ratio of 36, which is lower (if not in an entirely apples-to-apples comparison) than that of the U.S.-focused IWD, at 39. EFV’s portfolio P/E is also lower, as expected, than that of the broader iShares MSCI EAFE ETF (EFA), currently 42, according to FactSet data.
Charts courtesy of Stockcharts.com
EFV isn’t the only international stock ETF among top asset gatherers this year. Another cyclical-type play leading in creations that could also be seen as value hunting given recent performance is the iShares Core MSCI Emerging Markets ETF (IEMG). IEMG has picked up about $3.9 billion in net new money so far this year—one of the year’s biggest ETF creations.
IEMG is up 7% year to date, outperforming EFV, EFA and the SPDR S&P 500 ETF Trust (SPY). IEMG hasn’t outperformed SPY on a calendar-year basis since 2017, which also happens to be the only calendar year the fund beat SPY since its inception in 2012. Broad emerging market ETFs have struggled to beat U.S. stocks since at least 2010, but there’s been a strong narrative that their time to shine is nigh.
About 35% of IEMG currently sits in China/Hong Kong stocks, which has helped its performance as the Chinese equity market rallies. In the past 12 months, Chinese equities—think of funds like the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) and the iShares MSCI China ETF (MCHI)—have returned at least 20 percentage points more than SPY. China has been a strong market throughout the pandemic.
IEMG is the second biggest EM ETF in the market, with $80 billion in total assets, behind only the $81 billion Vanguard FTSE Emerging Markets ETF (VWO), and it’s among the cheapest ETFs in this segment, with a 0.11% price tag.
Investor appetite for international stock ETFs is alive and well this year, but it seems to be focused in areas delivering some of the biggest bang for the buck.
Contact Cinthia Murphy at [email protected]