Relative Weight ETF Spotlight: Back to the USA
WHAT WE’VE SEEN
After bottoming in December 2018, the ratio of U.S. stocks to international stocks is re-approaching the all-time highs that they hit in November thanks to strong performance from the Russell 1000®. As illustrated below, this ratio remains considerably above its historical average. In fact, its north of two positive standard deviations of the average.
Specifically, U.S. shares have outperformed international shares by 3.11% year-to-date, 10.26% over the last 1 year, 4.91% annualized over the last 3 years and 7.07% annualized over the last 5 years. With increased long exposure to the U.S. and risk-controlled short exposure to international markets, the Russell 1000®/FTSE All-World ex US 150/50 Net Spread Index is up 13.77% on the year.
U.S. RELATIVE TO INTERNATIONAL IS NEARING ALL-TIME HIGHS
MONEY IN MOTION
While ETF flows over the trailing three months still show a preference for international exposure, investors have flocked back to the U.S. over the last month to the tune of $7.41 billion driving a sharp positive gap with International ETFs.
Interestingly, International ETFs rolling 1-month flows were negative for a previous 32 days until yesterday, while rolling 1-month U.S. flows have been strongly positive since February 25.
U.S. FLOWS ARE DOMINATING INTERNATIONAL AGAIN
Source: Bloomberg Finance, L.P., as of March 12, 2019. Past performance is not indicative of future results. Data represents the relative net flows of U.S.-listed U.S. Equity ETFs and International Equity ETFs specifically targeting exposure to U.S. and international markets, respectively. For example, when the blue and dark blue lines are positive, U.S. equities gathered greater flows than International equities. On the other hand, when the blue and dark blue lines are negative, U.S. equities gathered less flows than International equities.
Whether one points to last week’s release of China’s February exports data massively disappointing relative to expectations or other recently released data, the outlook for global economic growth remains murky. This comes at a time when the European Central Bank recently announced a fresh round of stimulus including holding out until December to provide guidance on the path of rates along with announcing a program to provide inexpensive long-term loans for banks. We will leave it to economists to debate the long-term pros and cons of undertaking these actions less than three months after its bond buying program was phased out, but from a market perspective this follows the Federal Reserve’s recent shift to continued accommodation.
And, of course, there is the persistent saga that is Brexit to complicate matters with the latest development being a rejection of Prime Minister May’s Withdrawal Agreement. While the coming days will be fraught with continued volatility for the Pound and other U.K. assets, the increasingly likely outcome is a delay of Article 50 and the United Kingdom’s (hopefully) orderly departure from the European Union, which only compounds the level of uncertainty for companies and investors.
On a positive note for international equities, economic surprises across the Eurozone and the United Kingdom have been recovering from their recent lows implying that economic data releases may still be coming in worse than market expectations, but not as negative as they were. Surprises in Japan, which represents 17% of the FTSE All-World ex US Index, has been mixed as they recovered in January and early February, but have fallen into negative territory again highlighting the still questionable path forward for international shares.
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