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ETF Investors Ignore Election Nerves, Pump Cash into Europe
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Investors continued to pour money into European exchange-traded funds (ETFs) in June, despite volatility induced by elections in the UK and France.
U.S.-based investors were so relaxed about the political backdrop that the $1.3 billion they poured into European equity ETFs was the most since February 2023, according to BlackRock data.
With European investors also buying a net $910 million, June was the fourth consecutive month to exceed $2 billion for a continent whose stock markets have long been out of favor.
“US investors have become even bigger buyers,” said Karim Chedid, head of investment strategy for iShares in Emea at BlackRock. “Europe has been in the headlines because of politics. We knew the elections were coming in June, but the buying continued.”
While it is too early to say whether European stocks will continue to be in vogue now that the results of the UK and French elections are in, Chedid said there were reasons to be optimistic.
“European equity earnings have improved and ended a decade of stagnation,” he said, adding that from a general economic perspective, BlackRock was seeing “better macroeconomic data in Europe, especially as macroeconomic data has deteriorated more than in the United States.”
In the UK, demand for London-focused equity ETFs has hit a four-year high, with net inflows of $1.9 billion since the start of the year, while improving sentiment is also evident in government bonds.
“We have seen a pick-up in inflows into UK bonds and equities,” Mr Chedid said, with bonds benefiting from “the expectation that the Bank of England will likely start cutting rates in the third quarter”.
“There is a certain form of rapprochement with the United Kingdom, but it is still too early to assess the extent,” he added.
Overall, global ETF flows reached $128.1 billion in June, up from $116.4 billion in May and the second-highest figure of the year, with equity funds accounting for $90 billion of that amount.
As usual, the US stock market accounted for the bulk of demand for shares, although its share of the global total fell to 57% from 80% in May.
Separate data from State Street Global Advisors, covering only U.S.-listed ETFs, suggests the buying was driven by demand for ETFs focused on “growth” stocks, which raked in a record $15 billion.
Matthew Bartolini, head of SPDR Americas research at SSGA, said U.S. growth stocks rose 23% in the first half of the year, outpacing value stocks’ 4.6% return, an unusually wide spread.
“This gap between growth and value is in the 99th percentile since 1979 and is the fourth largest on record, behind only the months of the dot-com bubble,” he added.
U.S.-listed growth ETFs have now seen a record 16 consecutive months of inflows, Bartolini said, with growth stocks up 61% over that period, compared with 17% for value stocks.
In fixed income, BlackRock’s global ETF data shows that US bond ETFs, as is typical, absorbed the bulk of inflows, with Treasuries being the most sought-after asset.
However, demand for European and emerging market bonds was also strong.
Investment-grade inflows into the euro zone hit their highest level since February, at $1.4 billion, compared with $5.4 billion in the United States, while emerging market debt recorded a third consecutive month of inflows, at $1.6 billion.
Gold ETFs recorded a second consecutive month of inflows for the first time in a year. The $1.3 billion in net purchases – all by Emea investors – followed cumulative net sales of $24.1 billion between June 2023 and April this year, which raised eyebrows given that this coincided with a 20 percent increase in dollar terms.
“Gold has continued to perform well this year and last year due to geopolitical risks and central bank buying, particularly in emerging markets,” Chedid said, referring to ETF flows.
In terms of ETF issuers, iShares, already the global market leader, posted its highest monthly flows ever in June, according to separate data from Morningstar.
It raked in net income of $57 billion during the month, surpassing its previous peak of $42.6 billion in November 2023,
“iShares has seen its strongest monthly flows in history. It’s remarkable that the company has only seen outflows in two quarters since 2008, and those outflows have been very small,” said Syl Flood, senior product manager at Morningstar.
Flood attributed iShares’ strong growth, in part, to its prevalence in model portfolios used by financial advisors in the United States, including those it builds itself.
Its June inflows were driven by demand for the $503 billion iShares Core S&P 500 ETF (IVV) and a $54 billion iShares 20+ Year Treasury Bond ETF (TLT), but Flood said the purchases were “pretty well spread out.”
“That suggests that’s iShares’ strength in model portfolios, not just its own model portfolios but also third-party model portfolios,” he said.
However, while market number two Vanguard also saw decent inflows of $16.2 billion in June, number three State Street Global Advisors saw outflows of $1.1 billion, according to Morningstar data.
Its flagship product, the SPDR S&P 500 ETF Trust (TO SPY), the world’s largest ETF at $549 billion, has seen net outflows of $16.2 billion since the start of the year, even as competing S&P 500 funds have proven popular.
“State Street is going through 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 more expensive” than competing products.