Tuesday, July 16, 2024

ETF investors shrug off election jitters and pump cash into Europe

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Investors continued to pump money into European equity exchange traded funds in June despite volatility induced by elections in the UK and France.

US-based investors were so relaxed about the political backdrop that the net $1.3bn they sank into European equity ETFs was the highest since February 2023, according to BlackRock data.

With European investors also buying a net $910mn, June was the fourth straight $2bn-plus month for a continent whose bourses have long been out of favour.

“US investors have become even more sizeable buyers,” said Karim Chedid, head of investment strategy for iShares in the Emea region at BlackRock. “Europe has been in the headlines due to politics. We knew that the elections were going to happen in June but yet the buying continued.”

While it is still too soon to tell if European equities will continue to be in vogue now that election results in the UK and France are known, Chedid said there were reasons for optimism.

“Earnings have been improving in European equities and have ended 10 years of stagnation,” he said, adding that on the big-picture economic side BlackRock was seeing “better macro data in Europe, especially as the macro data had deteriorated more than in the US”.

Column chart of European equity ETFs, monthly inflows ($bn) showing US investors undeterred by European politics

As for the UK, demand for London-focused equity ETFs has risen to a four-year high, with net inflows of $1.9bn year-to-date, while an improvement in sentiment is also evident in government bonds.

“We have seen a pick-up in inflows into both UK gilts and equities,” said Chedid, with gilts benefiting from “anticipation that the Bank of England will likely start cutting rates in Q3”.

“There is a story of warming up to the UK, but it’s still too early to tell the scale of that,” he added.

Overall, global ETF flows hit $128.1bn in June, up from $116.4bn in May and the second-highest figure this year, with equity funds accounting for $90bn of this.

As usual, though, the US stock market accounted for the bulk of equity demand, even if its share of the global tally fell to 57 per cent, from 80 per cent in May.

Separate data from State Street Global Advisors, covering just US-listed ETFs, suggested this buying was led by demand for ETFs focused on “growth” stocks, which took in a record $15bn.

Matthew Bartolini, head of SPDR Americas research at SSGA, said US growth stocks rose 23 per cent in the first half of the year, trouncing the 4.6 per cent return of value stocks, an unusually wide gap.

“That growth-versus-value differential is in the 99th percentile dating back to 1979 and the fourth-largest ever, trailing only the dotcom bubble months,” he added.

US-listed growth ETFs have now seen a record 16 consecutive months of inflows, Bartolini said, with growth stocks up 61 per cent over this period, compared with 17 per cent for value stocks.

When it comes to fixed income, BlackRock’s global ETF data shows that US bond ETFs, as is customarily the case, soaked up the bulk of inflows, with Treasuries the most coveted asset.

However, demand for European and emerging market bonds was also solid.

Eurozone investment-grade inflows rose to their highest level since February, at $1.4bn compared with $5.4bn in the US, while emerging-markets debt garnered a third straight month of inflows, at $1.6bn.

Gold ETFs notched up a second consecutive month of inflows for the first time in a year. The $1.3bn of net buying — entirely driven by investors in the Emea region — came after a cumulative $24.1bn of net selling between June 2023 and April this year, which raised eyebrows given that it coincided with a 20 per cent rally in dollar terms.

Line chart of Gold ETFs, cumulative flows since Jan 2023 ($bn) showing Gold regains some lustre

“Gold has continued to perform well this year and last year on geopolitical risks and central bank purchases, especially in EMs,” said Chedid referring to ETF flows.

In terms of ETF issuers, iShares, already the global market leader, had its highest monthly flows ever in June, according to separate data from Morningstar.

It took in a net $57bn in the month, surpassing its previous peak of $42.6bn in November 2023,

“iShares had its greatest monthly flows ever. Remarkably, it has had only two quarters with outflows since 2008, and those outflows were very small,” said Syl Flood, senior product manager at Morningstar.

Column chart of iShares ETFs, monthly net flows ($bn) showing iShares saw record net inflows in June

Flood attributed iShares’ strong growth, in part, to its prevalence in the model portfolios being utilised by financial advisers in the US — including those it constructs itself.

Its inflows in June were led by demand for the $503bn iShares Core S&P 500 ETF (IVV) and $54bn iShares 20+ Year Treasury Bond ETF (TLT), but Flood said buying was “pretty well spread”.

“That hints that it’s the strength of iShares in model portfolios, not only its own model portfolios but third-party ones too,” he said.

However, while market number two Vanguard also saw decent inflows of $16.2bn in June, number three player State Street Global Advisors had outflows of $1.1bn, the Morningstar data show.

Its flagship product, The SPDR S&P 500 ETF Trust (SPY), the largest ETF in the world with $549bn, has seen net outflows of $16.2bn so far this year, even as rival S&P 500 funds have proved popular.

“State Street is having a tough time,” said Flood, who suggested that part of the reason was that SPY, with an expense ratio of 9.45 basis points, “is a little bit more expensive” than rival products.

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