Recent asset flows reveal exchange traded fund investors are turning away from domestic equities in favor of fixed-income and international stock exposure.
According to the Investment Company Institute, cash continued to flow into taxable bonds and international equities from U.S. fund investors for the 32nd consecutive week, reports Trevor Hunnicutt for Reuters.
World stock mutual funds and ETFs attracted $5.1 billion for the week while another $4.4 billion flowed into taxable-bond funds, according to ICI data.
Meanwhile, domestic equity funds somewhat recovered from the $11.6 billion in withdrawals the week prior but remained out of favor among investors. The funds experienced $2.1 billion in withdrawals over the seven days ended July 12, which marked a fourth straight week of withdrawals. Domestic stock funds have only brought in new inflows in four of the past 15 weeks.
Leo Acheson, senior analyst at Morningstar Research Services LLC, argued investors want to be in risk-assets like stocks but are looking abroad for better bargains, given the high valuations in U.S. markets. According to Thomson Reuters data, U.S. stock markets trade at around 23.6 price-to-earnings ratio, compared to the historic average of around 15.
Related: U.S. Stock ETFs Take a Breather on Latest Weak Earnings
Furthermore, foreign markets are beginning to outperform U.S. markets, which has further drawn investors’ attention. The MSCI ACWI Index has increased 17% this year, compared to the 11.5% rise in the S&P 500.
“U.S. equities have really led the way for a long time, but that trend has actually begun to reverse,” Acheson told Reuters.
Fund investor demand for bonds also remains high, despite the U.S. 10-year debt benchmark not delivering a yield above 3% since January 2014. Acheson believed that demand for bonds are elevated due to a greater number of Americans retiring from work and requiring more stable assets like debt securities.
For more information on the ETF industry, visit our current affairs category.