Trump Tax Reforms Boost Investment into US Equity ETFs

Investors pumped cash into US large-cap equity ETFs in the fourth quarter of 2017 as they look to cash in on buoyant markets

David Brenchley 17 January, 2018 | 1:51AM

US stock markets are up between 4% and 6% year-to-date already, and investors are keen to get in on the act

Retail investors pumped €4.66 billion into US large-cap equity exchange traded funds (ETFs) in the fourth quarter of 2017, nearly equalling the €4.72 billion added in the previous nine months of the year, according to data from Morningstar Direct.

Investors are increasingly pinning their hopes on US stock markets remaining buoyant, as President Donald Trump’s tax reforms continue to power indices across the Atlantic higher. US equity markets are generally 4-6% higher year-to-date, with the Dow Jones breaching 26,000 for the first time on Tuesday.

The final three months of 2017 was the best quarter for inflows into the Morningstar US Large Cap Blend Equity ETF category since the fourth quarter of 2014. In November and December 2017 alone it took in €4.35 billion of assets.

US Financials

Six of the 10 ETFs that saw the most net inflows were US equity-related, with the Vanguard S&P 500 ETF (VUSD) gaining €562 million of assets. While five of those six were general market trackers, one more specific offering sat in fourth: the iShares S&P 500 Financials Sector ETF (IUFS).

The fund aims to provide investors with a total return reflecting the return of the S&P 500 Financial Services Index, which spans banks, insurance brokers, asset managers and consumer finance.

Financials should be amongst the biggest beneficiaries of the tax reforms. This is because they are generally more domestically oriented, higher taxpayers, says Hugh Grieves, manager of the Miton US Opportunities Fund.

The prospect for higher interest rates is another positive on the horizon, for banks in particular, according to Philip Smeaton, chief investment officer at Sanlam UK. However, while he thinks financial services businesses will do well in 2018, he’s reluctant to own banks due to their high levels of leverage.

The Financials ETF has seen just over €1 billion of net inflows since July, with nearly €400 million of that coming in December. In June it saw €344 million flow out.

UK – Bouncing Back to Favour?

European offerings stood both at the top and at the bottom of the table for December. The Morningstar Gold rated iShares STOXX Europe 600 ETF (EXSA) saw net inflows of €727 million, while the iShares EURO STOXX 50 ETF (EUE) saw outflows of €760 million.

In fact, while the Morningstar Europe Large Cap Blend Equity category saw the second-most net inflows, the Morningstar Eurozone Large Cap Equity category saw the most outflows.

Of the former fund, Morningstar analyst Dimitar Boyadzhiev says it is one of Morningstar's best picks for comprehensive access to the investable market of developed Europe. At 0.2%, it is also one of the cheapest ways of gaining exposure to Continental stocks.

The UK was a surprise entry at the head of affairs, especially considering UK open-ended funds have seen big outflows throughout the course of 2017 due to Brexit and general political uncertainty.

The Morningstar UK Large Cap Blend Equity category saw net inflows of €350 million in December, the most in a single month since January 2016. The iShares Core FTSE 100 ETF (ISF) was the main beneficiary.

Elsewhere, investors are also getting excited about the prospects for stocks in Japan. Generally, stock markets in Japan, while running at multi-decade highs, are still some 40% off their previous all-time peak.

The Morningstar Bronze rated db x-trackers MSCI Japan ETF (XMJD) saw the most inflows in the fourth quarter of 2017 at €1.17 billion.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
DBXT MSCI Japan ETF (DR) 1C62.52 USD-0.29
iShares Core FTSE 100 ETF GBP Dist773.96 GBX-0.49
iShares EURO STOXX 50 ETF EUR Dist GBP3,165.22 GBX-0.25
iShares S&P 500 Financials Sect ETF $Acc7.25 USD-0.38-
iShares STOXX Europe 600 (DE)39.11 EUR-0.39
LF Miton US Opportunities B Acc218.50 GBP0.04
Vanguard S&P 500 ETF51.70 USD0.04
About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk