Funny thing about spring. It seems so cliché, but something about this time of year motivates me to clean house or spruce up my garden or simply just get organized. I tackled getting my closet in order over the weekend, and I must admit, I definitely feel refreshed!
Our latest analysis leads us to believe that many investors are applying a spring cleaning approach to their portfolios as well, rebalancing as the first quarter ended. The latest exchange traded fund (ETF) flows data show the industry just closed a record opening quarter. More specifically, investors are putting their money to work in markets outside the U.S. Of the $97.2 billion of net new assets raised in the first quarter, over $70 billion went into equity funds with international exposure.
The move to overseas exposure is the opposite of what we saw in the fourth quarter, when the all-time high of $138 billion into ETFs was concentrated in U.S. equities. This makes sense, as the U.S. economy picked up steam and markets responded favorably as 2014 drew to a close. As a result, we started 2015 with the U.S. being a bit stretched in valuations. Couple this with the looming headwinds of rising interest rates, the strong dollar putting pressure on U.S. exports and increased labor costs, investors are shifting their focus elsewhere.
Another reason for the shift: more attractive valuations in Europe as the ECB implements an accommodative policy to generate growth in the region. In fact, Europe alone saw a record quarter with $36.5 billion in equity ETF investments, of which German equity captured $4.8 billion.
We’re also seeing this in other developed markets overseas, as money is flowing into broader EAFE and Japan funds. Broader EAFE flows totaled $11.7 billion in the first quarter while Japan equity brought in $14.2 billion; corporate governance reforms have shown progress and pensions have announced further reallocation of assets to equities as well.
Ways to consider going overseas
If you’re interested in a little spring cleaning for your own portfolio, my colleague Heidi Richardson shared some insights about what Europe’s QE means for U.S. investors as well as several hints for Japan exposure.
Stay tuned for my next post, where I’ll provide an update for these trends and others.