Much gets written about the top ETFs when it comes to investor inflows. That's natural―people want to know what's hot and where investors are putting their dollars.
But the flip side can also tell a tale, particularly when there are enormous amounts of money coming out of a particular fund or a particular group of funds.
That's the case this year. The ETFs with the biggest outflows in 2016 share a few unmistakable themes. Six of the 10 biggest flows losers this year are ETFs tied to international markets, particularly Europe and Japan. Combined, they've seen redemptions totaling more than $30 billion, according to FactSet data.
There's no doubt that a lot of these outflows have to do with performance. Europe and Japan have performed poorly this year, which comes as an unpleasant surprise to many investors who raced into those areas amid hopes that monetary stimulus and weakening currencies would lead to outperformance.
Throwing In The Towel On Europe
That didn't happen, and now those investors are throwing in the towel as that thesis turns out to be wrong.
At the center of this phenomenon is the WisdomTree Europe Hedged Equity Fund (HEDJ). This is an ETF that picked up nearly $13.8 billion in assets last year on the back of the ECB-stimulus-strong-dollar thesis.
This year, it's already lost more than half that amount, or $7.2 billion, to outflows.
HEDJ provides dividend-weighted exposure to European stocks with a tilt toward exporters. In addition, it hedges its currency exposure by shorting the euro.
HEDJ is the perfect ETF in a scenario in which European stocks are rallying and the euro is weakening against the dollar. In that case, its export-heavy portfolio would benefit from a weak euro, while its euro short would protect it against currency losses.
In reality, European stocks have lagged this year, while the euro has actually strengthened against the greenback. HEDJ's 0.9% year-to-date gain isn't horrible by any means, but it’s a far cry from what investors expected of the fund entering the year.
Vanilla ETFs Out Of Favor Too
In addition to HEDJ, two other Europe-focused ETFs are currently on the top 10 outflows list for 2016. The iShares MSCI Eurozone ETF (EZU) and the Vanguard FTSE Europe ETF (VGK) have seen year-to-date outflows of $6 billion and $3.2 billion, respectively.
Like HEDJ, both of these ETFs saw large inflows last year, as investors bought into them in anticipation of strong performance in Europe this year. EZU had inflows of $7.3 billion in 2015, while VGK had inflows of $4.7 billion in the period.
The near-complete reversal of last year's flows into EZU and VGK is more evidence of investors throwing in the towel on their bullish Europe thesis. Both ETFs are down close to 1% this year, falling well short of investors' high expectations.
YTD Returns For HEDJ, EZU, VGK
Incidentally, EZU and VGK are vanilla market-cap-weighted funds; they don't hedge their currency exposure. EZU focuses on large- and midcaps stocks from eurozone countries, while VGK focuses on stocks of all cap sizes from all developed European countries. That means VGK holds stocks from the U.K., while EZU doesn't.