ETF Flows Reveal Investors' Changing Attitude About Global Equities

Exchange traded fund investors have been shying away from U.S. stocks, favoring international equities instead as domestic markets tumble.

In 2021, U.S. equity funds made up about 55% of the $1.07 trillion that flowed into equity ETFs, and the preference for U.S. stocks rose to 69% in December, the Financial Times reports. However, in January, U.S. equity ETFs only attracted just 11.2% of the net $66.2 billion in net inflows to the equity asset class.

In comparison, emerging market and European equity funds attracted the lion’s share of equity ETF inflows at 25.4% and 12.1%, respectively, with the bulk of the balance going toward broad developed market ETFs in January.

To put this in perspective, just $7.4 billion in new money flowed in to U.S. equity ETFs in January, compared to $87 billion in December and a monthly average of $48 billion for all of 2021.

Emerging markets, on the other hand, enjoyed net inflows of $16.8 billion over January, an all-time record, with China accounting for $11.7 billion of the inflows. Most of the new money came from China’s domestic market where the ETF industry is still in its nascent stages, while western investors funneled a net $4.1 billion into the Chinese markets.

“We are seeing a tilt away from the US towards Europe and EM,” Karim Chedid, head of investment strategy for BlackRock’s iShares arm in the EMEA region, told the Financial Times.

The financials sector has been a standout, gathering a record $10.9 billion.

“We are seeing increasing demand for financials. They look good in the context of higher rates and a potentially steeper yield curve from here,” Chedid added.

Peter Sleep, senior portfolio manager at 7 Investment Management, attributed the recent flows as simply a reflection of the fact that “money chases performance.” Consequently, with U.S. stocks slipping this year, money is finding its way in to “unloved” bourses such as the U.K. and global emerging markets.

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