Foreign Markets Become First Quarter ETF Darlings

After the recent Trump-induced rally in U.S. markets, exchange traded fund investors looked to overseas markets over the first quarter in search of more cheaply priced assets and potential opportunities. Moreover, many continued to turn to cheap ETF options to gain broad market exposure over the first three months of the year, reflecting the ongoing preference for cheap index based strategies.

The iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) was the most popular ETF of the first quarter, bringing in $6.6 billion in net inflows so far this year, according to XTF data. Investors may be looking at this cheap EM option as a way to gain access to emerging markets where valuations are much lower than the loftier prices in U.S. markets, especially after the recent Trump-induced rally.

The high inflows into IEMG also reflects the ongoing theme in the fund industry where cheap index-based strategies attract heavy inflows. Specifically, IEMG shows a cheap 0.14% net expense ratio, compared to the more popular iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which has a 0.72% expense ratio.

ETF investors gained increased exposure to developed markets through options like the Vanguard FTSE Developed Markets ETF (NYSEArca: VEA) and iShares Core MSCI EAFE ETF (NYSEArca: IEFA), which attracted $4.3 billion and $3.9 billion in net inflows, respectively, over the first quarter.

Investors may have also been riding the momentum in these overseas markets after the rally in U.S. equities stalled in the later weeks of the first quarter. Year-to-date, IEMG increased 14.0%, VEA returned 8.5% and IEFA gained 8.5%, whereas the S&P 500 index was up 6.0%.

Nevertheless, U.S. equities remained a popular, notably the cheaper ETF options. For instance, the S&P 500 Index still remained a go-to play, with the iShares Core S&P 500 ETF (NYSEArca: IVV) bringing in $6.0 billion in net inflows, followed by SPDR S&P 500 ETF (NYSEArca: SPY) with $5.1 billion and Vanguard 500 Index (NYSEArca: VOO) with $4.0 billion.

The broad Vanguard Total Stock Market Index ETF (NYSEArca: VTI) saw $2.8 billion in net inflows as well.

Additionally, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) saw $3.3 billion in net inflows and iShares Core S&P Mid-Cap ETF (NYSEArca: IJH) brought in $2.9 billion. The heavy interest in these "Core" positions may be attributed to their cheap management fees - IJR and IJH both come with a 0.07% expense ratio. In contrast, the popular small-cap play, iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the Russell 2000 benchmark, has a 0.20% expense ratio.

Among the most popular plays of the quarter, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD) was the only fixed-income option among the top ten. While LQD's and the broader bond market's performances were lackluster over the first quarter, especially in the face of a rising rate environment, BlackRock's own strategists may have been pushing the investment-grade corporate bond trade to its readers and clients, citing the higher income provided and favoring the investment-grade credit market as a way to cushion against rising interest rates.

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