A $1 Trillion Rally's Reward Is Billions of ETF Outflows

(Bloomberg) -- European stocks may be off to a roaring start this year, but ETFs tracking them aren't immune to the outflows that hit U.S. equity funds earlier in the quarter.

Despite an 11 percent surge for the Stoxx Europe 600 Index, exchange-traded funds targeting the region's shares have bled more than $4 billion in 2019. Among the biggest losers: benchmark products like the $8 billion iShares Euro Stoxx 50 UCITS ETF, from which investors have pulled the equivalent of around a tenth of its assets.

And traders who are opting to ride the new-year rally are doing so defensively -- currency-hedged funds and those holding Swiss stocks are among the few that have bucked the outflow trend.

It turns out investors in Europe aren't too different from those in the U.S., where traders pulled more than $18 billion from equity ETFs in January despite a rally -- a phenomenon that raised eyebrows across Wall Street.

“Market strength could be prompting a little bit of a re-balancing,” said Adam Laird, head of ETF strategy at Lyxor Asset Management in London, commenting generally on flows. “People do want to be more defensively positioned.”

This year's most popular funds reflect investor caution. Euro bears have added more than a billion dollars to two UBS ETFs that are hedged so that fluctuations in the common currency don't affect returns in the dollar- and Swiss franc-denominated products.

Morgan Stanley noted that February saw the largest inflow into currency-hedged euro zone ETFs by dollar investors since August 2015. That's a sign investors are “bearish on the euro,” strategist Sheena Shah wrote in a Feb. 21 note. The common currency has weakened 1.4 percent against the dollar this year on expectations that regional rates will remain low amid lingering economic and political risks.

Still, the flows are more of a trickle than a gusher -- the largest dollar-hedged European stock ETF continues its long streak of outflows uninterrupted. And while retail investors dominate in the U.S., flows in Europe-listed ETFs may just reflect a single institution tweaking its portfolio.

Playing Defense

Other funds that have defied the outflow trend are also defensively-oriented. These European equity ETFs had record flows on Monday:

• SPDR MSCI Europe Consumer Staples UCITS ETF saw inflows of 179 million euros ($202.5 million)
• iShares SMI ETF (CH) drew 170 million Swiss francs ($169.4 million)
• iShares SLI UCITS ETF (DE), which tracks the Swiss Leader Index, recorded 97 million euros

With large weightings in health care and consumer staples, the Swiss market has always been a haven in cyclical downturns. ETFs linked to the country's stocks have attracted $1.2 billion this year, amounting to 8 percent of their assets.

There's one unlikely winner amid the exodus: long-shunned U.K. equity funds, which have drawn more than $1.4 billion this year thanks to receding risks of a chaotic Brexit. The iShares Core FTSE 100 UCITS ETF is among the top five regional products for inflows this year.

--With assistance from Yakob Peterseil.

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Yakob Peterseil, Celeste Perri

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