Most Unpopular ETFs Of The Year

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.

Sinking Confidence In Japan ETFs

Outside of Europe, the other area of heavy ETF outflows this year is Japan. The circumstances for the WisdomTree Japan Hedged Equity Fund (DXJ) are almost exactly the same as that of the aforementioned HEDJ.

DXJ was supposed to be a strong performer as the Bank of Japan unleashed unprecedented monetary stimulus and as the Japanese yen weakened against the U.S. dollar. Instead, the yen has surged against the buck, and Japanese stocks have struggled despite the BoJ's efforts so far in 2016.

Year-to-date, DXJ lost 16.1%, upsetting investors that had plowed enormous sums of money into the fund in recent years. That compares with the 1% gain for the vanilla, unhedged iShares MSCI Japan ETF (EWJ), which has also fallen out of favor with investors.

YTD Returns For DXJ, EWJ

In addition to steady inflows in other years, DXJ and EWJ had two banner years for flows. In 2015, almost $3.8 billion went into DXJ, and $4.4 billion into EWJ, while in 2013, $9.7 went into DXJ and $7.1 billion into EWJ.

This year's outflows of more than $5.5 billion from each of the funds hasn't completely erased those past inflows, but it’s the first sign that U.S. investors may be giving up on Abenomics and the bullish thesis for Japanese stocks more generally.

Other ETF Losers

The aforementioned ETFs account for only half of the top 10 outflows list. Others include the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF), with outflows of $2.7 billion. DBEF holds developed-market equities outside the U.S. and Canada. Its portfolio is predominantly focused on Japanese and European stocks.

Two U.S. sector ETFs also made the list: the Financial Select Sector SPDR Fund (XLF), with outflows of $4.2 billion; and the Consumer Discretionary Select Sector SPDR Fund (XLY), with outflows of $2.2 billion.

Finally, rounding out the top 10 are the PowerShares QQQ Trust (QQQ), with outflows of nearly $6 billion; and the iShares Russell 1000 Growth ETF (IWF), with outflows of $2.6 billion.

YTD Returns For DBEF, XLF, XLY, QQQ, IWF

Top 10 ETF Redemptions (All ETFs)

*($B); Data provider: FactSet Research Systems

Contact Sumit Roy at [email protected].