Investor sentiment towards value ETFs is waning as stronger than expected Q3 earnings data coupled with inflationary fears maintain a run on the trade.

Over Q3, investors pulled roughly €3.7bn from value ETFs in Europe, according to Morningstar data, well above the previous record quarterly flow of €1.3bn recorded in Q1 2020 after COVID-19 ravaged markets.

Furthermore, outflows were experienced across regions. Investors withdrew most from US large-cap value equity at €542m in the three months to the end of October, while global and European large-cap value equity ETFs posted outflows of €363m and €279m, respectively.

Briegel Laitao, associate analyst at Morningstar, said the rotation into value stocks, sparked a year ago following the Pfizer vaccine results last November, has been less about value stocks outperforming and more about growth stocks underperforming.

“It is not so much that value stocks have done well, more than growth stocks have done poorly, with the exception of energy,” Laitao said.

“The recent rotation out of value has very much been profit-taking along with a very strong earnings season for global equities prompting a return to growth and quality.”

Meanwhile, inflationary fears have sparked broad equity market outflows over October, with savers pulling £148m from equity holdings, according to the latest Fund Flow Index from Calastone.

The annual inflation rate in the US rose to a 13-year high of 5.4% in September with leading economists arguing the spike in prices is transitory, while Federal Reserve chair Jay Powell has so far resisted tighening. 

The trend, a continuation of investor sentiment away from value since the mid-point of the year, does not show any signs of slowing down.

In October, as investors pulled a further €204m from value ETFs, while last week, the Xtrackers MSCI World Financials UCITS ETF (XDWF) and its US counterpart, Xtrackers MSCI USA Financials UCITS ETF (XFUN) recorded $268m and $121m outflows, respectively, according to data from Ultumus.

Meanwhile, the iShares Edge MSCI World Value Factor UCITS ETF saw an asset exodus of $154m over the past two weeks.

The flows come as the S&P 500 recovered from a 5% sell-off in September, rebounding 7% in October on better-than-expected Q3 earnings, despite supply chain and labour shortage headwinds, that has boosted investor confidence, according to the Bank of America (BofA).

In addition, the Russell 1000 Growth index (8.9%) has outperformed the Value index (5.1%) by 3.8% year to date, its largest lead since June, the bank said.

In turn, flows into growth-orientated ETFs have seen a strong uptick.

Two strongly correlated US growth market ETFs, iShares Core MSCI World UCITS ETF (SWDA) and the Invesco MSCI World UCITS ETF (SC0J) posted inflows of $753m and $240m over the past two weeks, respectively.

Elsewhere, the iShares S&P 500 Swap UCITS ETF (I500) ($153m), the Invesco S&P 500 UCITS ETF (SPXS) ($149m), the Xtrackers S&P 500 Swap UCITS ETF (XSPX) ($127m) and the Amundi S&P 500 (500G) ($98m) all posted strong inflows over the past week.

Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, added despite the H2 rotation, investors will still be looking to time their play back into value-orientated ETFs.

“Flows have been really strong and jumpy into value in general and those will come back in quickly if it starts to run again. Investors have wanted value to outperform for so long they are ready to pounce,” he said.

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