European investors use ETFs to pile into US equities

Exchange traded funds have enabled the flow of billions of dollars from Europe into US equities as investors piled into ETFs exposed to this year’s huge US stock market rally, data from Refinitiv show.

European flows into US equity ETFs industry surged to €27bn in the 10 months to the end of October 2021 — almost four times the €7bn of inflows recorded for US equities for the whole of last year, according to Financial Times calculations based on Refinitiv data.

In contrast, European equity ETFs listed in Europe had attracted only €5bn of inflows by the end of October, although this too was a significant jump on the €2bn achieved last year.

Deborah Fuhr, founder of ETFGI, a consultancy group, said the flows showed investors were chasing the best returns. “It has nothing to do with European equity ETFs per se. It is more about the exposure in terms of where [investors] think markets are going to be performing better, and also asset allocation,” she said.

Jose Garcia-Zarate, associate director of passive research, Europe, Middle East and Africa at Morningstar, agreed that US equity had proved particularly attractive. “It all started at the end of 2020, when the vaccines started to be rolled out. And that set the stage for a resurgence of interest in equity, and particularly for equity in the US,” he said.

The flows could partly be explained by the general preference among European institutional investors for passive strategies to access US equities, according to Guillaume Prache, managing director of BetterFinance.

Garcia-Zarate agreed: “Passive vehicles, such as ETFs and index funds, are the default investment option for US equity. It is very difficult to find an active manager on the US equity market that can beat an index, such as the S&P 500.”

But Patrick Wood Uribe, chief executive of Util, a sustainable investment data provider, said the trend pointed to potential difficulties in maintaining a commitment to sustainable investing if the focus was too much on performance.

“If [investing in overseas equities] happens too much with European investments, there is going to be a dislocation between the source of the asset ownership and the kind of destination of the investment. And that is something that, if it doesn’t end up getting more dissipated over time, is going to be an issue.”

According to Refinitiv, assets under management in the European ETF industry rose to about €1.3tn at the end of October. US equities ETFs accounted for the lion’s share with combined assets under management of €286bn, followed by global equities (€181bn) and European equities (€136bn).

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