ETF Investors Dump US Stocks for Eurozone Equities

Passive investors are moving away from US equities, putting their money in Europe instead, data from Morningstar Direct reveals

Karen Kwok 30 May, 2017 | 2:23PM
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Are you worried about stock valuations in the US market? You’re not alone. According to Morningstar Direct data, ETF investors are dropping US equity passive funds and opting for European stocks instead.

Investors pulled €1.6 billion out of US large-cap equity ETFs in April, making it the least popular sector of the month, data from Morningstar revealed. Investors have not pulled that amount of money out of US large cap equity ETFs since March 2015 where the sector saw €2 billion outflows. 

Instead, investors are opting for Eurozone large cap equity ETFs, which recorded €1.6 billion inflows in April. This boosted means year-to-date Eurozone equity ETFs have seen inflows totalling €3.5 billion.

“Flows into European equities continued last month, seemingly spurred on by the French election first round result and consensus-beating earnings numbers,” said Patrick Mattar with BlackRock.

After pro-European Presidential candidate Emmanuel Macron found victory in the French elections, fear of populist rule in Europe has fallen. Meanwhile, in Germany, Angela Merkel’s party won convincingly in a regional election – the state of North Rhine-Westphalia.

“This is a small state but this victory indicates a shift back to mainstream stability, which bodes well for Angela Merkel in the German national election in September,” said Anthony Rayner, manager of Miton’s multi-asset fund range.

“These events, combined with the failure of the far-right to win in the Dutch election in March, have stalled the populist, anti-EU surge that began last year with Brexit.”

Positive economic figures coming out from the Eurozone also suggest that the region is becoming a better investment opportunity than before. Eurozone inflation hit 1.9% for the year to April, up from 1.5% in March, according to Eurostat. European companies’ earnings have seen positive improvement, with more than two thirds of European companies beating earnings expectations in the first quarter as earnings grew 25%, data from Fidelity showed.

Which is the Most Popular ETF?

The ETF with the largest inflows within the Eurozone large cap equity space is iShares EURO STOXX 50 ETF (DE) (EXW1), with €631 million in April. The ETF is under a Neutral Rating by Morningstar analysts. It is followed by iShares Core EURO STOXX 50 ETF (CSX5) and UBS ETF MSCI EMU (UB06), with €461 million and €215 million inflows in April respectively. UBS ETF MSCI EMU is Gold Rated by Morningstar analysts.

“The Euro Stoxx 50 is a widely followed benchmark to gauge investor sentiment on eurozone equities. But with only 50 components capturing 60% of the Euro area’s total market value, it stands as a narrow investment proposition that does not represent the opportunity set available to investors. The fund is unlikely its category peers over the long term.

!That said, there is no shortage of passive funds offering exposure to the popular Euro Stoxx 50, many of which have seen their fees slashed in recent years. The fully replicated iShares Euro Stoxx 50 (DE) ETF levies a midrange ongoing charge of 0.16%,” said Hortense Bioy, director of European passive fund research with Morningstar.

However, the UBS MSCI EMU ETF is one of the very strongest passive offerings in a category in which we feel active managers struggle to add value, said Kenneth Lamont, passive analyst with Morningstar.

“The fund offers broad and representative cap-weighted exposure to eurozone large-cap equities for a 0.18% ongoing charge, the second-lowest fee for a fund tracking the MSCI EMU Index,” said Lamont.

Investor Sentiment Sours 

The US bull market has been outperforming other markets since 2009, however many expect changes will be taken place soon. Financial advisers have signalled a move away from US equities, the latest research from Aegon, the investment platform, showed.

Forty per cent of financial advisers think that US equities are the most over-valued asset class, a sentiment backed by high price to earnings ratios, a strong dollar and a market cap to GDP ratio that’s nearing heights last seen in the US shortly before the Dotcom bubble of 2000.

“Developed markets like the US have outpaced other equities in recent years and now appear to be a victim of their own success with financial advisers turning to alternatives that offer the potential for better returns,” said Nick Dixon, Investment Director at Aegon UK.

Alastair Irvine, product specialist with the Jupiter Merlin team echoes this sentiment, telling Morningstar that: “In the period from March 1 to May 9 this year, every company in the S&P 500 lost money bar the FANG stocks; Amazon (AMZN), Google (GOOG), Facebook (FB) and Netflix (NFLX). When you have performance like that it’s a ringing a warning bell for investors.”

Irvine added that it was time to dump passive funds in favour of stock pickers. His peers, John Chatfeild-Roberts agreed, saying that investors are guaranteeing underperformance in a passive.

“The charges will mean you can’t beat the benchmark even in a rising market,” he said. “In a downturn, you are condemned to lose more than the market. The compounding effect in a down market is not pretty. If you lose 50% one year you have to make up 100% the next year to make it up to where you were.” 

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.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk