Massive Amounts Of Money Are Leaving The US For Europe

SPDR S&P 500 ETF (SPY) is one of, if not the largest ETF's based on net asset value, which currently sits at $177 billion. That should though come as no surprise since the ETF mimics the S&P 500 and is quite frankly the easiest way for investors to diversify their portfolio in stocks, while taking on no more risk than necessary. I often recommended this to others and refer to it as the best one stop shop for investors, regardless of their goals.

But recently, we have been seeing large amounts of money moving out of SPY. January 20th nearly $4 billion was pulled out, during two days, January 28th and 29th, more than $5 billion was removed, $2.4 billion on February 20th, another $2.3 billion on March 20th, another $9 billion from March 26th to the 30th, April 20th another $4 billion, from April 28th to May 1st $8 billion, and May 19th $3.3 billion was pulled out.

All and all, since the start of 2015 SPY has lost $44 billion or nearly 20% in net asset value.

Furthermore, 2015 has not been a bad year for the S&P 500 nor SPY, as they have risen 4.1% and 4.08% respectively year-to-date. So why is all the money pouring out?

I believe there are three big reasons.

The first is that the market, S&P 500 in this case is not currently cheap, trading at 20.53 times earnings. The S&P 500 has a median PE ratio of 14.58 and a mean of 15.54 over the past 145 years. So historically yes the market is trading at an above average multiple. If we expand that thinking it would indicate sooner rather than later the market will revert to the mean and in doing so, either share prices will have to come down or earnings will have to grow.

While I would love to see earnings grow rapidly in the future, I don’t see that happening do to a number of reasons; the impending rising of interest rates in the US, rising minimum wages around the country (which will hurt bottom lines), slow (or even slowing i.e. China) international economies.

The second reason is that because the markets are trading at a higher than normal multiple and it would appear a pullback could be coming, investors may be getting more strategic with their money. Instead of putting all their money to work in the market as a whole (S&P 500 or SPY in this case), perhaps they are cherry picking stocks they feel may not feel a pullback as much, or they are moving to bonds, commodities, or other forms of investments which provide a hedge or safety if US stocks as a whole begin to decline.

That leads me to my next reason, the outflow of funds in SPY may be due to the European Union's Quantitative Easing program. When Ben Bernanke explained the US's QE program, he said one of the goals was to push investors in stocks, which would help boost assets prices, which was believe to help get the economy moving again. From the looks of it, Ben was correct in stating that the QE program would increase stock prices; the market has been setting new record highs.

Now that Europe has begun its own QE program, we can assume that European stocks will rise simply from the need to find yield as bond rates fall. The reason QE moves stocks higher because investors who would normally put money in bonds are forced to find higher yields elsewhere as interest rates fall to minimal levels. Since expectable yield can't be found in bonds, stocks become the next best option, and then prices are bid higher as more demand for stocks increase.

We have already begun to see a few European ETF's see funds increase as investors pulled money out of SPY and the US market. Year-to-date the Vanguard FTSE All-World ex-US ETF (VEU) has seen its funds rise by 9% or $1.2 billion. This ETF does not invest in US companies and when broken down by country the fund has 14% of its assets in the UK, 6.6% in Germany, 6.56% in Switzerland, and 6.45% in France. While the fund does hold assets in slowing economies like China, its portfolio concentration is only 3.58%, meaning if China continues to slow, investors shouldn’t be hurt very much.

The Wisdom Tree Europe Hedged Equity ETF (HEDJ) has seen its funds jump $13.4 billion since the start of 2015, a 194% increase in funds in just five months. This ETF tracks an index of Eurozone dividend-paying companies and is hedged against the euro, making it more attractive for US investors.

The iShares MSCI Germany ETF (EWG) has seen $2.1 billion in funds flow in since the start of 2015, increasing its assets by 41%. This fund simply tracks a market cap weighted index of German companies and since Germany is the largest and by most opinions the healthiest EU country, the EWG seems like a safe bet.

At the end of the day, investors need to remember that market corrections happen and that trying to time them is nearly impossible. With that being said, pulling money out of the SPY for fear of a crash, is not a good investment decision. But, if you believe Europe offers better opportunities due to QE and high S&P 500 PE ratio today, than maybe you are onto something. Regardless though, invest for the long term, not just the next few weeks or months.

Happy Investing!

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513