Even European ETF Investors Don’t Like Europe Stocks Much

Pulling up a list of the 10 biggest ETFs in Europe offers some unexpected results: not a single fund centered on European stocks rounds out the docket.

(Bloomberg) — Pulling up a list of the 10 biggest ETFs in Europe offers some unexpected results: not a single fund centered on European stocks rounds out the docket. 

Instead, there are a few exchange-traded funds tracking the S&P 500, gold and emerging markets. There’s even a fund focused on environmental, social and governance factors in the mix, according to data compiled by Bloomberg. The first Europe-centric equities fund on the list comes in at the 22nd spot. 

It’s a sign of just how reticent Europe ETF investors might be about the continent’s companies.

“The problem has been that the European economy has been weaker, its inflation is worse and the European Central Bank is still tightening,” said Michael O’Rourke, chief market strategist at JonesTrading.

Read more: Europe’s Rising Inflation-Risk Gauge Is a Headache for ECB

With inflation pressures persisting in the euro region after an uneven quarter of economic growth, some economists expect the ECB will likely raise interest rates again, even as the Federal Reserve is seen as potentially being done hiking in the US.

Another reason that investors buying Europe ETFs are interested in US stocks are the returns. The Stoxx Europe 600 Index is up 8% this year through Monday’s close, while the S&P 500 has jumped 17% and the tech-heavy Nasdaq 100 is up 39%. 

Still, there is the view that Europe ETF investors aren’t giving up on the continent’s stocks. Instead, they seem to be using ETFs to get broader diversification, said Jane Edmondson, co-founder of EQM Indexes. 

“I don’t think it is an anti-Europe macro call,” she said. “I just think that European investors are looking for other exposures, but not necessarily eschewing local investment.”

But for European stocks to stand out again, the region needs to see disinflation and a return to growth, according to Emmanuel Cau, head of European equity strategy at Barclays. Recent strength in the euro can actually bring earnings of euro-area companies down by about 3%, his research has found. 

“Such small headwinds hurt when there is no economic growth,” he said in a July 27 note to clients. “If the currencies were gaining because the European economies were growing faster, the effect of the strong currency on earnings would matter less because they would be buoyed by growth in the economy. But they are not.”

–With assistance from Sam Potter.

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