ETF Investors Flee Int’l Stocks

Why investors have pulled money from international equity ETFs in droves this year.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

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

TickerFundYTD Net Flows ($M)
IEFAiShares Core MSCI EAFE ETF7,478
VXUSVanguard Total International Stock ETF4,483
IXUSiShares Core MSCI Total International Stock ETF3,594
IEMGiShares Core MSCI Emerging Markets ETF2,824
VWOVanguard FTSE Emerging Markets ETF2,317
SCHFSchwab International Equity ETF2,018
EFAViShares Edge MSCI Min Vol EAFE ETF1,580
ACWViShares Edge MSCI Min Vol Global ETF1,440
BBCAJPMorgan BetaBuilders Canada ETF1,398
BBEUJPMorgan BetaBuilders Europe ETF1,015

 
The iShares MSCI EAFE ETF (EFA), the iShares MSCI Emerging Markets ETF (EEM) and the iShares MSCI Japan ETF (EWJ) have had outflows ranging from $4.4 billion to $9.7 billion so far this year.

 

Top Int’l Equity Outflows

TickerFundYTD Net Flows ($M)
EFAiShares MSCI EAFE ETF-9,720
EEMiShares MSCI Emerging Markets ETF-5,469
EWJiShares MSCI Japan ETF-4,423
VTVanguard Total World Stock ETF-1,738
EZUiShares MSCI Eurozone ETF-1,656
ACWIiShares MSCI ACWI ETF-1,605
FXIiShares China Large-Cap ETF-1,514
DXJWisdomTree Japan Hedged Equity Fund-1,459
VGKVanguard FTSE Europe ETF-1,377
ACWXiShares MSCI ACWI ex U.S. ETF-1,263

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

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.