Market Overview

Plenty Of Reasons To Embrace Domestic ETFs

Plenty Of Reasons To Embrace Domestic ETFs

While 2018 is still in its early stages, several of this year's top asset-gathering exchange-traded funds are international equity funds. To be precise, five of this year's top 10 asset-gathering ETFs are international equity funds.

Even with the brief retrenchment experienced by U.S. stocks earlier this month, the iShares Core S&P 500 ETF (NYSE: IVV) has added $9.33 billion in new assets this year, more than any other ETF. IVV is one of just two ETFs with more than $100 billion in asset under management. The SPDR S&P 500 ETF (NYSE: SPY) is the other. Various data points suggest there are reasons to remain enthusiastic about U.S. large-caps.

“The ratio of upgrades to downgrades for U.S. large caps stands at the highest level since the data series started in 1988,” said BlackRock. “Upward revisions are solid globally, but the U.S. strength is unmatched. Japan is unique, as earnings revisions there tend to be noisy. We see the strong U.S. earnings momentum persisting in the short term and leading to higher returns.”

Inklings Of Momentum

Investors speculated the early February pullback in U.S. stocks could be damaging for higher beta, momentum fare, but the iShares Edge MSCI USA Momentum Factor ETF (CBOE:MTUM) remains higher by almost 6 percent year-to-date.

“U.S. earnings growth momentum was already strong before the announced tax cuts and fiscal stimulus, thanks to an improving economy,” said BlackRock. “Earnings growth for S&P 500 firms was 15 percent year-over-year in the last quarter of 2017, and sales growth was the highest since the third quarter of 2011. Some 60 percent of the S&P 500 companies providing guidance during fourth quarter earnings season exceeded what analysts had penciled in for 2018.”

MTUM has its own momentum. Only nine ETFs have added more new assets this year than the $1.74 billion added by MTUM. That's a significant percentage of the $7.46 billion of the ETF's overall assets under management.

Fuel For More Upside

Valuations for U.S. equities remain at the upper end of historical norms, but there are other catalysts that could fuel upside for domestic ETFs, such as IVV and MTUM.

“We see earnings-per-share (EPS) growth and dividends fueling returns,” said BlackRock. “Some companies will choose to spend their tax windfalls on buybacks or dividends; others will boost capital spending. The scope for additional M&A activity is also large.”

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