European investors dump US equity ETFs in February

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European investors pulled money from US equity exchange traded funds in February for the first time since May 2023 in a sign of an abrupt change in sentiment on the continent towards US equities and in contrast to their US peers.

European-domiciled ETFs that invest in US equities suffered $510mn in outflows in February, even though total inflows into ETFs in Europe edged up to $35.3bn in February.

The picture was in marked contrast to November last year when flows to European-domiciled US equity ETFs peaked at $22.8bn, representing nearly 80 per cent of all purchases of European ETFs.

In the US, in contrast, US equity ETFs attracted $48.1bn in February representing nearly half of all the money flowing into US ETFs.

“The clearest change in trend took place in Europe. Perhaps investors began shunning the US [in favour of] European stocks due to geopolitical tensions, but they could also have been chasing performance,” said Bryan Armour, director of passive strategies research for North America at Morningstar.

He pointed to good fundamental reasons for the change in flows from Europe. European stocks have beat the US market for two months in a row, he said, and technology stocks, which make up 31 per cent of the Morningstar US Market index but just 8 per cent of its European equivalent, have floundered since the start the year.

However, the data suggests that US investors were not quite as concerned about headwinds for US equities as were their European counterparts.

“The reality is it’s probably a mixture of geopolitics and performance. We will see what to make of this new trend in the coming months,” Armour said.

If the trend was to continue it would mark a striking reversal of a status quo in Europe where the Investment Company Institute, an industry body representing the asset management industry in the US, has noted a three-fold increase in allocations to the US from Ucits funds, Europe’s dominant fund structure, over the past decade.

Shane Worner, ICI economist, said Europeans held €548bn to US exposures — mainly equity and money market funds — in 2014, but that had jumped to €2.28tn by the end of 2024.

“The outperformance of the US relative to international assets is stark, everyone knows that,” Worner said. “But periods of relative US outperformance are followed by periods of relative outperformance in international (ie, non-US) assets,” he added.

Worner said he was aware of recent calls on Europeans to invest more in their home continent, but added: “For me as an economist, we want to see people invest according to their risk profile. We don’t want to see people investing according to political boundaries.”

Mario Draghi, former European Central Bank president, made one such appeal in September last year when he called for more investment in Europe by Europeans in a report to the European Commission. A paper earlier last year from Enrico Letta, a former Italian prime minister, to the European Council also talked of the need to mobilise private capital in Europe.

Benoit Sorel, global head of ETF, indexing and smart beta at Amundi, said he thought different forces had prompted the sharp withdrawal from US equities in Europe.

“Several factors have pushed for such rotation, from geopolitical developments with progress towards the resolution of the conflict in Ukraine for Europe and inflationary measures in the US,” Sorel said.

He pointed to elements such as the Trump administration’s imposition and threats of tariffs, divergence in monetary policies between Europe and the US and the “more fundamental question on the US mega tech stocks’ growth and valuations”.