Why Investors Are Bailing Out Of U.S. Stock ETFs

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Includes: EEM, GLD, SPY
by: Zacks Funds

U.S. stocks witnessed their largest redemption since the Brexit vote in June to the tune of $8.9 billion in the week ended March 22, 2017. This happened as Donald Trump's first major legislation, the Affordable Health Care Act was delayed for vote on Thursday, March 23, 2017, and subsequently withdrawn the next day.

The debate among Republicans over the bill increased market volatility and raised investors' concerns about the other promises made by the President. The S&P declined for the sixth day in a row on Friday, as the healthcare bill was withdrawn.

Why Are Investors Worried?

The healthcare bill was one of the major promises made by Donald Trump during his campaign. Investors are worried that if the Republican cannot deliver on such an important issue, then the future of tax reforms, the primary reason for the stock market rally since the election, is also uncertain.

The political skepticism is evident from the returns of the major market indices. The S&P 500 is down 2.3% from its March 1, 2017 level. The Russell 2000, a small cap index representing the sentiments of the U.S. economy in general, is down 4.3% since the start of the month.

Investors are now shifting their portfolio allocation with increased inflows to consumer defensive sectors like utilities, up 6.9% compared to the market's 2.9% since February, and safe havens like gold. Emerging market funds are also seeing great inflows, as uncertainty regarding President Trump's protectionist agenda prevails.

Due to the current shift in investor optimism and changed views on the future of promised legislations, investors are eyeing other investments and moving out of U.S. equities as witnessed by the redemptions.

In a sample time frame, March 13, 2017 to March 24, 2017, SPY, the biggest U.S. equity ETF witnessed a net outflow of $1.028 billion. On the other hand, EEM, the most popular emerging market ETF, recorded $474 million in net inflows, and GLD, the gold ETF garnered $354 million in net inflows.

This makes sense as investors are looking at the emerging markets for higher returns amid increased tension in the U.S.

iShares MSCI Emerging Markets ETF [EEM]

This fund is the most popular in the emerging market equity space with $29.9 billion in AUM.

China, South Korea, and Taiwan constitute more than 50% of the fund exposure. Around 22% of fund assets are allocated to its top 10 holdings. It charges 67 basis points in fees per year. Financials, Technology and Consumer Cyclical are the top three sectors with almost 60% of fund assets allocated to them. The fund returned 13.71% in the year-to-date time frame and 18.94% in the past one year (as of March 24, 2017). As such, EEM currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

SPDR Gold Shares ETF [GLD]

This fund offers exposure to one of the most sought after metals. It is a straightforward fund suitable for investors looking for a pure play on this metal, as it buys gold bullions and securely stores it in vaults.

The fund has an AUM of $33.5 billion and charges a fee of 40 basis points a year. The fund returned 8.44% in the year-to-date time frame and 1.94% in the past one year (as of March 24, 2017). As such, GLD currently has a Zacks ETF Rank #3 with a Medium risk outlook.

Bottom Line

There is high uncertainty regarding the implementation of President Trump's policies, following the failure of his healthcare bill. Emerging market investments that declined following the election results now demand a second look, owing to the better-than-expected performance of these funds and doubts related to Trump's protectionist policy implementation. Even though there are concerns regarding the tax reforms, it cannot be certainly said this fall in the markets is the beginning of a correction.

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