Spanning The Globe With ETFs
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Key Takeaways
In the one-month period ended Aug. 24, global equity ETFs pulled in $8.0 billion of new money, even as U.S. equity products had nearly $5.0 billion of net outflows in the same period according to CFRA’s First Bridge ETF database. While the non-U.S. category flows are significantly lagging year to date, further diversification internationally could support risk reduction.
The broad regional ETFs iShares Core MSCI EAFE ETF (IEFA) and the Vanguard FTSE Europe ETF (VGK) gathered $1.9 billion and $532 million of new money in the past month, respectively, significantly improving their year to date cash haul.
Meanwhile, global factor and thematic ETFs gathered $14 billion thus far in 2020, with persistent demand for funds such as the iShares ESG MSCI EAFE (ESGD).
Fundamental Context
Investors have started returning to global equities in search of diversification benefits. Global equities ETFs—which CFRA classifies as any fund with some exposure to non-U.S. stocks—have been out of favor for most of 2020.
However, in the rolling one-month ended Aug. 24, these ETFs gathered $8.0 billion of net inflows, erasing the prior 2020 outflows, and gaining ground even as U.S. equity ETFs incurred $4.9 billion of net outflows.
While year to date net inflows of $5.7 billion for global equities is a fraction of the U.S. equity category’s $64 billion, it is an encouraging sign that investors have started to better balance their portfolios. Outperformance by U.S. equities will not last forever, and a portfolio heavily weighted toward the S&P 500 Index comes with risks.
Equity ETF Category Flows ($B)
Source: CFRA’s First Bridge ETF Database, as of Aug. 24, 2020
Recent demand for broad regional equity ETFs rivals global thematic and sector-based products. While the global equities category incurred net outflows as of late July, there were some bright spots at the subcategory level. Global equity factor and thematic ETFs had pulled in $11 billion, with the ARK Innovation ETF (ARKK) and ESGD gathering $2.3 billion and $1.2 billion, respectively, in the period.
Meanwhile, aided by $1.2 billion into the U.S. Global JETS ETF (JETS), global industry/sector ETFs gathered $5.7 billion. Many investors might not think of ARKK or JETS as global ETFs, but they hold international stocks such as Taiwan Semiconductor and Air Canada, not just U.S.-domiciled Tesla (TSLA) and United Airlines (UAL).
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
In the past month, flows continued into ARKK, ESGD and JETS, as well as many other global factor, thematic and industry/sector ETFs pushing the subcategories’ year to date cash hauls to $14 billion and $6.7 billion, respectively.
Broad Regional ETFs
However, global broad regional ETFs flows have taken a sharply positive turn in the past month, limiting the outflows incurred through late July. These ETFs pulled in $4.5 billion of new money, shrinking the subcategory’s year to date net outflows by more than one-third to $7.9 billion.
Global Equity ETF Subcategories Flows ($B)
Source: CFRA’s First Bridge ETF Database, as of Aug. 24, 2020
iShares and Vanguard international equity ETFs returned to favor in the past month. The developed international equity ETF IEFA was down 4.4% year to date through Aug. 24, underperforming the 7.6% gain for the iShares Core S&P 500 ETF (IVV).
However, the international ETFs’ 3.6% gain in the past month is closer to the 6.9% return for the iShares U.S. large cap counterpart. IEFA pulled in $1.9 billion of new money in the last month in contrast to IVV’s $265 million of outflows, pushing the year to date net inflows for IEFA to $2.4 billion.
VGK is another broad regional product that gained in popularity in the past month. VGK pulled in $531 million, limiting the ETF’s year to date net outflows to $660 million. VGK, which provides exposure solely to Europe, and not Japan, as is found in IEFA, rose 3.0% in the last month.
CFRA’s European Investment Policy Committee sees a possible recovery in the eurozone economy based on the Economic Sentiment Indicator, and believes the European Central Bank will continue to provide the region ample liquidity.
iShares and Vanguard also offer the iShares Core MSCI Total International Stock ETF (IXUS) and the Vanguard Total International Stock ETF (VXUS), which invest in developed international markets as well as emerging ones such as China and Taiwan. VXUS and IXUS pulled in $1.1 billion and $665 million of new money in the past month to push their year to date inflows to $6.1 billion and 3.1 billion, respectively.
Flows Of Certain Broad Regional Global Equity ETFs ($B)
Source: CFRA’s First Bridge ETF Database, as of Aug. 24, 2020
Conclusion
Demand for non-U.S. strategies has increased in the past month, particularly with broad regional products that offer diversification benefits relative to S&P 500 Index-based strategies. With expectations that international markets recover in 2021 due to an improved macroeconomic picture, investors will benefit from the diversification to other countries these ETFs provide.
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.
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