Investors are looking to take profits from the recent US stock rally by investing in S&P 500 tracking exchange-traded funds, data from Morningstar showed. In December alone, US large-cap blend equity in Morningstar Categories attracted €936 million, the most popular sector, according to fund flows tracked by Morningstar Direct.
Vanguard S&P 500 ETF (VUSA) was the most popular ETF among Morningstar.co.uk readers in November and December following the outcome of the US Presidential Election, based on website hits. Investors were also seeking out ETFs that track other developed market indices. Vanguard FTSE All-World ETF (VWRL), Vanguard FTSE 100 ETF (VUKE) and iShares Core FTSE 100 ETF (ISF) topped the most clicked list in December. They were followed by iShares UK Dividend ETF (IUKD) and S&P US Dividend Aristocrats ETF (UDVD).
Post-Election Stock Market Surge
The interest stems from President-elect Donald Trump’s yet-to-be-confirmed policies which may strengthen the US economy, and in turn drive the US stock market higher.
Next week, the US central bank chair Janet Yellen is expected to confirm further interest rate rises in 2017. Key economic indicators are supportive of the measure, with near-all-time-high US employment figures and a pick up in inflation.
During his election campaign, Trump promised to increase infrastructure spending and create more jobs in the US should he win the presidency. Since Trump’s election, the S&P 500 has risen by 6%.
Keith Wade, Schroders’ chief economist said investors had fully bought into Trump’s promise to ‘make America great again’. However, such optimism should be questioned.
“The impact of the new president’s fiscal policies will not be felt until end-2017 and into 2018. There are some tricky waters to be navigated before they take effect. At present markets do not seem to be anticipating problems either in terms of delays by Congress, or in boosting growth significantly,” said Wade.
Dave Eiswert, portfolio manager of the T.Rowe Price Global Focus Growth Equity fund echoes Wade’s views, saying that investors need not to forget that there is an element of honeymoon around US politics at present.
“The best days to be buying stocks were in the first few days after the US election result, and even better, in the period before the result. We would emphasise that, today, there’s a need to think longer-term and potentially trim some of the initial winners as policies become more distinct from the promises of an election campaign that became extreme by anyone’s measure,” said Eiswert.
From a valuation perspective, John Owens, senior portfolio manager at Morningstar Investment Management said the US market’s valuation is rather full, if not rich. Owens warned US stock market still holds significant risks.
The “CAPE” measure is in line with Owen’s views as CAPE ratio of the US is now at 23.4 against an average 19.8 over 10 years, meaning that US equities are expensive. The CAPE ratio is the Cyclically Adjusted Price-to-Earnings ratio, which is widely used as a long term measure of stock market valuation, providing a view on whether the stock is trading over or under the shares’ value.
Vanguard S&P 500 ETF offers broad and diversified exposure to U.S. large-cap stocks by tracking the S&P 500, the most oft-cited proxy for the U.S. equity market, Morningstar passive analyst Monika Dutt said.
“With a low ongoing charge of 0.07% – one of the lowest among all S&P 500 index funds and ETFs – and a soundly constructed and reasonably representative benchmark, this fund is well positioned to continue its long streak of producing superior risk-adjusted returns relative its category peers,” Dutt added.
FTSE 100 All Time High
The FTSE 100 broke through the 7,300 mark for the first time last week, uplifted by weak sterling and positive Christmas sales figures for the retail sector. Since Trump’s election the FTSE 100 has risen 6.3% in sterling terms. Earnings for the UK market overall should benefit from the large proportion of the index that is made up of commodities and resources stocks, said Schroder’s UK equities fund manager Sue Noffke. As a result, it comes no surprise ETF investors have been looking at ETFs that track the UK stock markets. Investors poured €276 million into UK large-cap blend equity ETFs in Morningstar Categories in December, according to Morningstar Direct. The sector saw €1.2 billion inflows in 2016.
“These parts of the market are being helped by easier comparatives from early 2016 and a full calendar year of weaker sterling for overseas earners. This should both improve balance sheets and the ability to pay dividends, especially for oil companies, or the ability to pay some dividends through capital returns to shareholders, such as through share buy backs,” said Noffke.
The Vanguard FTSE All-World ETF aims to replicate the FTSE All-World Index, which, with more than 3,000 constituents, covers 90%-95% of the global equity market capitalisation, Morningstar analyst Dimitar Boyadzhiev added. The FTSE All-World allocates 7%-10% of its total value to emerging markets, making it a more comprehensive index than the popular MSCI World Index.
Precious Metals ETFs Saw Outflows
ETFs Physical Gold (PHGP) was also on the most clicked ETFs list on Morningstar.co.uk in December. However, while precious metals ETFs in Morningstar Categories saw €10.3 billion inflows in 2016, the last two months of the year saw outflows – €674 million and €1.1 billion outflows in November and December respectively.
