US and European ETFs See Switch From Value To Growth Stocks in Q3

European Growth ETFs, which focus on “growth” stocks, attracted €120m in the three months to September, their strongest quarter since 2015. The move mirrored the US, where growth ETFs took in $9.4bn in Q3, the second strongest quarter on record, and reversing the $8.5bn of net outflows the sector suffered in the previous 12 months. Growth stocks typically trade at higher price-to-earnings or price-to-book-multiples

The move followed European Investors in Q3 pulling a record net €3.7bn from European value ETF according to Morningstar Direct. The previous record quarterly outflow was €1.3bn in the first quarter of 2020 with the start of the Covid-19 pandemic.

Net inflows to value ETFs in the US slowed to just $1.5bn in the third quarter, having topped $62bn in the previous nine months.

European investors had bought in a net €12.3bn to value ETFs in the previous 9 months. However in the US, value stocks completely surrendered the gains they made vis-à-vis growth stocks since the start of October 2020, while in Europe they are close to doing so the Financial Times reported.

The switch followed the change of sentiment over the rollout of Covid-19 vaccines late last year running into lockdown and vaccinations issues coupled with the supply crisis stymieing the expected rebound in global economic growth that was the thesis for buying value stocks.

“It’s a classic case of people chasing performance,” Peter Sleep, senior portfolio manager at 7 investment Management, said of the sharp turn in investor sentiment.

“Disposable savings were very high, people said it was going to be the jazz age all over again. Then we had higher petrol prices, higher gas prices, increasing inflation and high labor costs, and that has taken a little bit of steam out,” Sleep argued.

Growth or value stocks—a quick cheat sheet via Fidelity

Growth stocks

  • More “expensive:” Their stock prices are high relative to their sales or profits. This is due to expectations from investors of higher sales or profits in the future, so expect high price-to-sales and price-to-earnings ratios.
  • Riskier: They’re expensive now because investors expect big things. If growth plans don’t materialize, the price could plummet.

Value stocks

  • Less “expensive:” Their stock prices are low relative to their sales or profits.
  • Less risky: They have already proven an ability to generate profits based on a proven business model. Stock price appreciation isn’t guaranteed, though—investors may have properly priced the stock already.

Source: FT, Morningstar, Fidelity

From The TradersCommunity US Research Desk