Exchange-traded funds saw record-breaking growth in 2017, but despite the dozens of records set by the U.S. stock market—along with a near-total absence of volatility or pullbacks—investors showed more interest in opportunities offered abroad.
According to OppenheimerFunds, which cited data from Morningstar, international equity ETFs were the most popular fund category of the year, in terms of inflows.
About $136.78 billion has flowed into such products in the year through November, eclipsing the $120.7 billion that went into U.S. funds over the same period.
Chart courtesy OppenheimerFunds
The preference comes at a time when overseas stocks are seen as offering both higher levels of growth and cheaper valuations than the U.S., which is the world’s most-expensive market by one calculation.
Of course, U.S. stock-based ETFs were still in high demand, even if they were the runner up to international funds. About $120.7 billion went into the category over the year, followed by the $105.6 billion that went into taxable bond ETFs.
The most popular fund of the year was the iShares Core S&P 500 ETF /zigman2/quotes/204263249/composite IVV +0.30% , which had $31.7 billion in 2017 inflows. That was followed by the iShares Core MSCI EAFE ETF /zigman2/quotes/205252932/composite IEFA +0.33% , which had $20 billion in inflows. EAFE covers developed markets outside the U.S. and Canada; it stands for Europe, Australasia and Far East.
That fund was followed by the Vanguard FTSE Developed Markets ETF /zigman2/quotes/202394679/composite VEA +0.39% ($16.4 billion) and the iShares Core MSCI Emerging Markets ETF /zigman2/quotes/201783445/composite IEMG +0.29% ($15.7 billion). Of the top 10 most popular U.S.-listed equity funds, according to an analysis of FactSet data, six of them tracked non-U. S. indexes.
Overall, ETF inflows have topped $400 billion thus far this year, “an annual inflow record for the category and representing a 16.3% lift from the January 1 market cap of $2.5 trillion,” wrote David Mazza, head of ETF investment strategy at OppenheimerFunds.
The fourth-most popular fund category in 2017 was sector-based equity funds, which saw a total of $35.3 billion in inflows.
While the technology sector saw the biggest gain over the year—the Technology Select Sector SPDR ETF /zigman2/quotes/207444675/composite XLK -0.28% is up 33.6% in 2017—it came in second behind financials in terms of inflows. The financial sector, as measured by the Financial Select Sector SPDR ETF /zigman2/quotes/209660484/composite XLF +0.72% , is up 20.1% year-to-date; financial-sector ETFs had about $10 billion in inflows. Both the health-care and the consumer discretionary sectors also outperformed financials, though they lagged behind when it came to ETF flows.
Chart courtesy OppenheimerFunds
Flows in and out of the financial sector will likely be more volatile than that of other sectors, when measured on absolute-dollar terms, as the sector is the largest in terms of ETF assets. The financial SPDR fund, the largest to track the sector, has $33.1 billion in assets, according to FactSet. The tech SPDR, the second largest, only has $19 billion in assets.