You better look beyond U.S. borders if you haven't made the move already. That's the message that exchange-traded fund flows data is sending stock investors.
A month after March set a five-year high for monthly inflows into overseas equity ETFs—at $22 billion—the April level of flows into overseas equities ETFs broke that record, with $25 billion in net flows into international equity ETFs.
The month-over-month record leapfrogging means the message is not new, but it's a sign that instead of leveling off, the trend among investors bailing on U.S. equities for more international exposure has accelerated.
Investors pulled a net $16 billion from U.S. equity ETFs in April, according to monthly data from FactSet. The list of the biggest ETF losers in April flows runs the gamut of U.S. equity buckets: small-cap, large-cap, financials, technology, real estate, health care, utilities. But the biggest flow loser of all was the proxy for the U.S. market—the SPDR S&P 500 ETF (SPY)—which saw negative $13 billion in flows.
The only bright spots in April for U.S. stocks were mid-cap and energy, which were No. 5 and No. 6 in April flows among ETF asset classes—energy being no surprise with the big crude-oil price rally.
Stacey Brorup, of FactSet's ETF research team, said the most notable positive turn for the U.S. was in the fixed-income market. March had seen net outflows of $900 million, while April saw inflows of around $3.56 billion. "That's a big reversal in investor sentiment," she said.
Top 10 ETF asset classes
- Developed markets, ex-U.S.: $6.9 billion
- Developed Europe: $4.9 billion
- Emerging markets: $2.5 billion
- Japan: $2.3 billion
- U.S. mid-cap: $1.7 billion
- U.S. energy: $1.5 billion
- Global ex-U.S. equities: $1.5 billion
- U.S. total market: $1.1 billion
- Germany: $1 billion
- U.S. government treasury short-term: $939 million
(Source: FactSet, April ETF net flows)
The biggest winners of all in the overseas push—and they have been since last year—are the hedged equity ETFs, targeting markets such as Japan and Europe. As the dollar strengthened and central banks in Europe and Japan have become the forefront of stimulus efforts, the hedged international equity approach has been the biggest ETF asset winner.
"Europe and Japan stock markets in particular are expected to continue to benefit from their central banks' largess. They also look attractive from the valuation perspective, as U.S. stock valuations are getting stretched after more than six years of bull run," said Neena Mishra, director of ETF Research at Zacks Investment Research.
"Currency hedging has been the biggest story in the ETF world this year as monetary policy divergence sent the U.S. dollar soaring against other currencies," Mishra said. She thinks inflows into currency hedged ETFs may continue in the coming months, though not at the pace seen in the first quarter.
Mishra said that data should not be interpreted as a sign investors are bailing on U.S. stocks wholesale, but that more investors are finally getting the message about international diversification. U.S. stocks may continue to grind higher, but the easy money in U.S. stocks has already been made, and returns this year will most likely be lackluster, she said. So investors have been looking for better opportunities abroad.
Biggest U.S. equity ETF losers
- U.S. large-cap: negative $12.8 billion
- U.S. small-cap: negative $2.5 billion
- U.S. real estate: negative $1.4 billion
- U.S. high-dividend yield: negative $1 billion
- U.S. financials: negative $812 billion
(Source: FactSet, April ETF outflows)
—By Eric Rosenbaum, CNBC.com