The Rush to Developed Markets ETFs Continues

June 26, 2017

Looking for attractively valued alternatives to U.S. equities, investors continue to show enthusiasm for developed market stocks and exchange-traded funds (ETFs). That enthusiasm was on display last week, as highlighted by a a flurry of inflows to ETFs tracking the widely followed MSCI EAFE Index and related benchmarks. For the week that ended June 22, five of the top 10 asset-gathering ETFs were developed market funds tracking the MSCI EAFE Index or an equivalent index, along with an ETF that is a direct competitor to those funds.

During the week that ended June 22, the iShares MSCI EAFE ETF, the largest ex-U.S. developed markets ETF and one of the largest equity-based ETFs of any variety, added $1.13 billion in new assets. That brings EFA’s second quarter inflows to just over $6.1 billion – a total surpassed by just one other ETF.

Not to be outdone, at least not by much, is EFA’s low-cost counterpart, the iShares Core MSCI EAFE ETF. IEFA tracks the MSCI EAFE IMI Index, while EFA tracks the MSCI EAFE Index. IEFA is the ETF for cost-conscious investors, as it costs just 0.08% per year, or $8 on a $10,000 investment. That is also just 25% of the annual fee found on EFA. IEFA’s second quarter inflows are close to $4.9 billion, a tally topped by EFA and just one other ETF. Year to date, only three ETFs have added more new assets than IEFA. The low-cost ETF added $450.3 million in new assets for the week that ended June 22.

EFA and IEFA have a credible competitor from Vanguard in the form of the Vanguard FTSE Developed Markets ETF, which has also been packing on new assets. VEA tracks the FTSE Developed All Cap ex US Index and differs from EAFE ETFs because it features exposure to Canada. Canadian stocks account for almost 8% of VEA’s weight, making that the fourth largest country weight in the ETF.

“This is not a new phenomenon in the space as we have featured these inflows in 2017 from time to time in our daily segments, as EFA has pulled in over $9.3 billion year to date via creation activity, IEFA has raised more than $8.9 billion, and VEA north of $8.7 billion,” said Street One Financial Vice President Paul Weisbruch in a note out Friday.

EFA, IEFA and VEA are the three largest developed markets ETFs, and none of them feature currency hedges, indicating that investors are willing to take on currency risk with these international investments. “Perhaps this is a reflection of the willingness of investors and portfolio managers to put money to work in EAFE stocks and spurn any kind of currency hedge, at least judging from the fairly balanced (and large) asset inflows across the three largest funds in the space: EFA, VEA and IEFA,” said Weisbruch.

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