As noted in separate articles on ETF.com this month, annual flows into U.S.-listed exchange-traded funds are in record territory, and it's the giant broad market ETFs―such as the SPDR S&P 500 ETF (SPY)―that have been the most popular funds in 2016.
Yet, as overwhelming and widespread the rush into exchange-traded funds has been this year, not all ETFs have garnered investors' favor. In fact, as of this writing, there are 10 ETFs with year-to-date outflows of more than $2 billion each.
The common thread shared by most of these ETFs? They're focused on international equities. Seven of the 10 least popular ETFs of 2016 track equities outside of the U.S., particularly European and Japanese stocks. That includes the biggest loser of them all: the WisdomTree Europe Hedged Equity Fund (HEDJ).
Reversal Of Fortune
The ironic part about HEDJ being the least popular ETF of 2016 is that it was the most popular ETF of 2015. Last year, the fund saw inflows of $13.9 billion; this year it recorded outflows of $8.1 billion. Talk about a reversal of fortune.
HEDJ's fall from grace is a reflection of investors throwing in the towel on the ECB-stimulus-strong-dollar trade. 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.
Performance Rebounds Since The Election
For much of 2016, HEDJ wasn't performing well. Despite unprecedented monetary stimulus from the ECB, European stocks were lagging (they still are) and the dollar was selling off. Part of that equation changed in the last several weeks―the dollar surged to 14-year highs following the election of Donald Trump, bumping up HEDJ's year-to-date gain from close to zero to more than 9% currently. But that's only stemmed the bleeding of assets for HEDJ.
YTD Return For HEDJ
Indeed, though the dollar's renewed ascent puts currency-hedged ETFs such as HEDJ in a more favorable light, it will take much more than that to get finicky investors interested in the fund again. After all, Trump's election has not only ignited the dollar, it's ignited confidence in the U.S. economy and U.S. equities, putting international stocks on the back burner.
Aside from HEDJ, three other Europe-focused ETFs also made 2016's unpopular list. The iShares MSCI Eurozone ETF (EZU) had outflows of $6.7 billion; the Vanguard FTSE Europe ETF (VGK) had outflows of $3.6 billion; and the iShares MSCI Germany ETF (EWG) had outflows of $2 billion. As unhedged products, the trio lagged the aforementioned HEDJ with returns ranging from -2% to 2% in the year-to-date period.
Investors Losing Confidence In Japan
Outside of Europe, the heaviest outflows this year came from Japan ETFs. The WisdomTree Japan Hedged Equity Fund (DXJ), with its $5.8 billion of outflows for the year, shares a similar story to that of WisdomTree’s HEDJ.
According to the prevailing thesis, monetary stimulus from the Bank of Japan was supposed to lift Japanese equities and push the yen down against the dollar. Instead, Japanese stocks did merely so-so, and for much of the year, the yen surged against the dollar.
At one point this year, DXJ was down almost 25% for 2016. Now, thanks to the comeback in the greenback, the fund is in the green for the year, to the tune of 3.4%. But that's likely not enough to get investors excited about Japanese ETFs again.
YTD Return For DXJ
It will take a lot more to get investors buying into DXJ and its unhedged competitor, the iShares MSCI Japan ETF (EWJ)―which had outflows of $4.5 billion this year.
Incidentally, before 2016, 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 billion went into DXJ and $7.1 billion into EWJ. This year's outflows haven'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.
For a full list of this year's most unpopular ETFs, see the table below:
Data measures the year-to-date period through Dec. 16.
Contact Sumit Roy at email@example.com