International Topped US Stock ETFs in January

International equity exchange-traded funds trounced their domestic counterparts’ inflows last month as investors searched for better-valued stocks overseas. 

International equity funds brought in $20.2 billion in January, according to ETF.com data, the second largest inflows into any asset class last month and more than double the December figure. That far outpaces the $1.4 billion that went into U.S. equity products during the same period, which was a big drop from December’s $16.9 billion.

Investors turned to foreign stocks to kick off the year as a weakening dollar, a less aggressive Fed and lucrative returns in overseas markets lured assets away from U.S. equities. International equity funds are likely to maintain their growth in the coming months, experts say.  

Late 2022 was the first time in four years that overseas stock returns outpaced U.S. markets, which helped draw assets to international funds, according to Matthew Bartolini, head of SPDR Americas Research.  

“You have strong relative momentum, strong relative earnings sentiment and strong relative valuations. That's going to lead people to buy,” Bartolini said in an interview with ETF.com.  

European equities in particular have grabbed investors’ attention, with a record $5.6 billion going into the regional asset. Among the top-performing European equity funds listed on U.S. markets was the JPMorgan BetaBuilders Europe ETF (BBEU), which brought in $3.47 billion in January, ETF.com data shows.  

Other top-performing non-U.S. funds included the iShares Core MSCI Emerging Markets ETF (IEMG) and the iShares JP Morgan USD Emerging Markets Bond ETF (EMB), which collectively drew in $5.57 billion in inflows last month. 

Dollar Strength and the Fed’s Next Move  

Adding to international equity funds’ lure is the weakening U.S. dollar, which may ease repatriation costs.  

“For U.S. investors who are invested in international equities, when those returns get translated back into U.S. dollars, they go down,” Aniket Ullal, head of ETF data and analytics at CFRA research told ETF.com. “Dollar strength offsetting local market returns obviously hurt international investors or other investors into international ETFs.” 

The strength of the U.S. dollar has been an uphill battle for many U.S. firms and investors in recent months. According to data from Kyriba Corp., currency fluctuations cost North American companies $43.2 billion hit in the third quarter of 2022 alone, Bloomberg reported. That’s the highest since the firm began tracking data 10 years ago. 

If inflation continues to ease and the Federal Reserve ends its rate hike regime, the dollar, which hit a 20-year high last September, is expected to weaken in coming months, Gene Frieda, global strategist at PIMCO, said in a blog post.  

Also buoying investors’ sentiment on overseas equities is the recent movements of the Federal Reserve, according to Adam Kobeissi, founder of The Kobeissi Letter, a global market commentary newsletter. If the Fed, which has already signaled it’s nearing the end of its rate hiking cycle, maintains its tone, international equities could remain in focus for the months to come.  

“We have seen a general return in risk appetite as soft-landing hopes are high, recession expectations are turning more mild and peak inflation is behind us,” Kobeissi said in emailed comments. “As long as the Fed begins to show signs of a ‘pivot’ over the next few weeks, risk appetite will remain, and this will certainly continue to support international equities.”  

Contact Shubham Saharan at [email protected]