Japan May Not Dominate the Olympics, But in ETFs It Takes Gold

(Bloomberg) -- It may not be an Olympic event, but when it comes to attracting cash from investors in exchange-traded funds, Japan and China are taking home the medals.

Buyers have poured almost $800 million into U.S.-listed ETFs tracking international equities this year through Feb. 20, according to Bloomberg data. That’s a 4.3 percent jump in the strategies’ market capitalization, compared to a 0.3 percent rise in the market cap of funds tracking domestic equities.

The trend is even more pronounced in fixed-income. ETFs tracking international bonds have seen their market cap grow by almost 8 percent this year, while funds tracking U.S. bonds have increased just 0.8 percent, the data show.

Whether your attention has been partially diverted by international sport or not, it’s hard not to have noticed the recent stock swoon. And amid U.S. equity volatility, investors have paid special attention to single country plays abroad.

"Volatility starts to put money in motion as people look for more opportunities, for the next big idea," said Jay Jacobs, director of research for Global X Management Co. "The recent volume spike could introduce more movement of capital and the direction we’ve seen is more internationally."

The iShares MSCI Japan ETF, known by its ticker EWJ, has taken in more than $3 billion this year -- that’s already five times more than what investors put in all of last year. Similarly, buyers have poured about $405 million into the iShares MSCI China ETF (ticker MCHI) this year, compared to outflows of more than $250 million last year.

"The performance, valuations and earnings growth in these markets is hard to ignore, and it’s increasingly harder for investors to justify a position that isn’t overweight to Japan and China, " said Tushar Yadava, iShares investment strategist at BlackRock Inc.

That’s not all. Investors may also want to consider areas of the world with ongoing reform momentum, as those countries tend to outperform peers, he said. Brazil and South Africa are two markets where economic reforms are not fully priced in, there is accelerating GDP growth, strong expected earnings growth, and significant potential for political catalysts, according to Yadava.

The strongest investor interest for Global X country strategies has been in a fund tracking Greek equities, Jacobs said. The Global X MSCI Greece ETF (ticker GREK) is the only U.S.-listed fund with exposure to the country, seeing almost $55 million in inflows this year.

More Tactical

Investors are bullish as Greece has finally put together a few quarters of economic growth, is starting to bring down its unemployment rate, and is planning on exiting its debt bailout program in August, Jacobs said. GREK is heavily exposed to financials, with over 30 percent of the fund’s holdings in banks.

"Investors of single country funds tend to be more tactical," Global X’s Jacobs said. "There are investors that chase performance, but there are also buyers that chase event-driven behavior. An ETF is just a convenient vehicle for people to express opinions on those themes."

But just like the Olympics, not everyone can be a winner. Funds tracking companies in Mexico have been loosing cash as the country’s involvement with politics -- at home and abroad -- have made cautious investors take a step back.

The iShares MSCI Mexico ETF (ticker EWW) has seen the largest outflows so far in February than any full month since May 2017, data compiled by Bloomberg show. More than $140 million has been withdrawn from the fund as investors head into more diversified strategies amid concern surrounding the nation’s upcoming presidential elections, said Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital.

"Investors of single country funds tend to be more tactical," Global X’s Jacobs said. "There are investors that chase performance, but there are also buyers that chase event-driven behavior. An ETF is just a convenient vehicle for people to express opinions on those themes."

--With assistance from William Mathis

To contact the reporters on this story: Carolina Wilson in New York City at cwilson166@bloomberg.net, Sarah Ponczek in New York at sponczek2@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Morwenna Coniam, Eric J. Weiner

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