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February 3, 2023

European Region ETFs Reap the Benefits of Domestic ETF Outflows

by Jack Fischer.

Federal Reserve Chair Jerome Powell said this week that the labor market remains “out of balance.” Economists expected the U.S. economy to have added 185,000 jobs last month, following the 223,000 added in December. Forecasts also had the unemployment rate increase from 3.5% to 3.6%.

But guess what? The Department of Labor (DOL) reported the U.S. economy added 517,000 jobs—you are not reading that wrong. The January jump was the largest increase since July. The unemployment rate also dropped to 3.4%, nearing an almost 54-year low. The largest industry job adds were in leisure and hospitality (+128,000), professional and business services (+82,000), and government (+74,000). Other highlights were the labor force participation rate moved up from 62.3% to 62.4%, while average hourly earnings increased 0.3% month over month—up 4.4% from last year.

The job numbers shocked everyone, as U.S. employers continually appear in the headlines announcing job cuts. The firm Challenger, Gray & Christmas reported that U.S. companies were getting rid of more than 100,000 positions in January, the highest monthly level since September 2020 and the largest reduction to start a year since the Great Recession. This week the Federal Reserve also announced another interest rate hike, though this time the increase was only 25 basis points (bps), moving the federal funds target rate at a range of 4.50% to 4.75%.

While the rate hike was modest, the Fed commentary was anything but. Powell explained that Fed officials “will need substantially more evidence to be confident that inflation is on a sustained, downward path.” He added that the Fed will have to continue its restrictive monetary policy for the foreseeable future.

Are investors betting on the U.S. markets or are they taking their talents elsewhere? So far in 2023, domestic equity ETFs have suffered $4.5 billion in outflows, following a December outflow of $2.4 billion. Most of the year-to-date outflows in domestic equity ETFs have come from Lipper Large-Cap Growth ETFs (-$5.8 billion).

With domestic equity ETFs struggling, Lipper’s world equity fund classifications appear to be the early winners. The two-top Lipper classifications in terms of inflows since the start of the year are Lipper European Region ETFs (+$5.3 billion) and Lipper Emerging Markets ETFs (+$5.0 billion).

Lipper European Region ETFs posted a record weekly intake last week, attracting $2.9 billion. This week they saw another significant inflow of $1.1 billion. The last time this classification saw back-to-back weeks of inflows of more than $1.0 billion was in May 2021.

The attraction certainly isn’t past performance and is more than likely based on a fundamental basis. Lipper U.S. Diversified Equity Funds reported a 3.44% gain on average over the past week and a 10.67% gain since the start of the year. World equity funds, on average, underperformed over the last week (+0.73%) and since the start of the year (+9.87%).

Is this push into international funds and away from U.S.-focused investments going to persist?

Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Find out more.

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