Investors Move Money From U.S. Into Foreign Stocks

BOSTON (TheStreet) -- China's rapid expansion is slowing, Germany slashed its economic growth forecast to only 1% for 2012, Brazil cut interest rates and Greece still hasn't solved its ballooning debt problem. According to ETF investors, those are reasons to buy foreign equities now.

Global equity exchange traded funds have hauled in nearly $5 billion since the beginning of September, investment-research firm TrimTabs says. In contrast, U.S. stock ETFs have seen outflows of $8.5 billion. Two ETFs with the heaviest inflows are the iShares MSCI EAFE Index ( EFA) and iShares MSCI Emerging Markets Index ( EEM), the latter of which attracted $1.2 billion in the past week.

ETF investors are bullish on foreign equities despite the uncertainty that clouds international markets. In Europe, policymakers across 17 nations are still deciding on the European Financial Stability Facility bailout, while Germany's economy is now forecast to grow about half as much. Emerging markets, particularly Brazil and China, are showing signs they're running out of steam.

Many foreign markets have been crushed this year. According to Bespoke Investment Group, Greece's market is down 45%, Brazil has fallen 20%, India is off 16% and Germany has slipped 13%. Even China's stock market has dropped 13% this year, compared with a 2.6% decline for U.S. equities.

And yet, the iShares MSCI Emerging Markets Index has rallied 12% since Oct. 3 and the iShares MSCI EAFE Index has gained 9%. TrimTabs says that even China funds, which have bled assets through most of this year, are "attracting a great deal of interest." China region ETFs pulled in $769 million in the past two weeks, which TrimTabs says may be because the Shanghai Composite has a lower forward price-to-earnings ratio than the S&P 500.

Investors are still bearish on domestic shares, withdrawing more money from U.S. equity ETFs. TrimTabs estimates that retail investors took out $7.6 billion from U.S. equity mutual funds this month, although that pace has slowed. ETF investors are similarly downbeat on U.S. shares, redeeming $2.5 billion from U.S. equity ETFs this month.

TrimTabs says the selling of U.S. equity funds "should cheer bullish market participants" because of the contrarian view.

At the same time, the researchers also note that the leveraged ETF crowd, which is more short-term in nature, is betting on lower stock prices. The leveraged short U.S. equity ETFs pulled in 7.1% of assets last week while leveraged long funds shed 4% of assets. "Leveraged ETF flows are an excellent contrary indicator," TrimTabs analysts write.

-- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

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