ETF investors react to two-speed global economy

speed trapU.S. equities lead the charge in November as optimistic investors poured money into a country whose economy is running ahead of the world. With great looking job numbers and consumer spending on the rise, the U.S. Federal Reserve has strongly hinted that a rate hike will come before the end of the year.

All this is showing up in global ETF flows. Out of US$28.2 billion in new assets, $21.4 billion flowed right into U.S. equities, according to data from BlackRock’s November ETF Landscape Report. Most of that went into large cap funds, but flows into small caps and sector funds also held their own at $3.4 billion and $3.9 billion respectively. Cyclical sectors like technology and financials showed that investors are happy where these companies are in the business cycle. ETFs focused on tech stocks saw $2.1 billion in inflows while financials lpulled in $1.4 billion.

As investors express their optimism over the economic prospects of the U.S., the rest of the world appears to be a few beats behind, with central banks continuing their focus on measures to stimulate slowing economies. And reaction from investors is mixed. According to BlackRock’s data, the recent promise of more stimulus from the European Central Bank drove up European stocks and pushed bond yields into negative territory. This had the largest impact on inflows into broad developed markets equity ETFs, however, pushing inflows to $6.4 billion. Pan-European funds saw much smaller gains: just $1.4 billion.

Another country that’s been subjected to heavy—if controversial—stimulus measures is Japan. As that country slipped into recession despite years of Abenomics, investors tended to hold their ground: Japan equity funds had modest outflows in November—just $0.9 billion. Apparently stock valuations in that country still look decent compared to the U.S., giving many investors are reason to hold on.

And finally, China has continued to weigh heavily on the minds and wallets of investors. Slowing Chinese growth had investors pulling money out of China’s funds and emerging markets equity funds overall—$2.0 billion and $2.5 billion of outflows, respectively.

As equity inflows into ETFs shifted in reaction to the good news-bad news global economy, fixed income was a different story. The specter of a rate hike saw investors pulling money out of U.S. Treasury Funds ($4.5 billion). Sovereign debt funds also saw outflows as a result German bond yields, which are now negative up through five years. European expected deposit rates are also on the negative side.

Of course, once the rate hike in the U.S. materializes, all bets will be off. All eyes will be on ETF investors to see whether they react swiftly or whether they take a wait-and-see attitude over the coming months. Anyone care to hazard a guess?