Key Takeaways
- European investors are moving money back into US stock ETFs after shunning them earlier this year.
- European stocks were outperforming but have lost momentum as US markets rally into October.
- While skepticism about US stocks appears to have been short-lived, investors are continuing to show interest in European stock ETFs.
For many years European investors have favored US equity exchange-traded funds over their home markets. So when investors rushed to pull money out of US stock ETFs earlier this year and piled into European stocks amid the market turmoil sparked by US President Donald Trump’s trade wars, it seemed as if an important shift was taking place.
However, as worries about Trump’s trade wars have faded and US stocks rebounded from their April plunge, European investors are once again shoveling money into US stock ETFs. In August, EUR 5.2 billion went into US equity large cap blend ETFs, the core stock fund category home to S&P 500 strategies. That was the largest influx of money and an increase of over EUR 2.8 billion on July’s inflows.
“People were never going to stay away from the US forever,” says Morningstar chief European markets strategist Michael Field. “It’s almost 70% of the Morningstar Global Markets Index, so it can’t be ignored.”
But in a break from the recent past, European stock ETFs have also been seeing heavier interest. EUR 1.3 billion was invested in European stocks in August, which was a fall from the EUR 3.1 billion of inflows in July but also compares with total inflows of EUR 864 million in the fourth quarter of 2024.
The Rotation Out of US ETFs
After a stretch in which investors strongly favored US stock ETFs over European stocks, the April announcement of Trump’s tariffs stoked talk of a US-led global recession and caused significant volatility in global equity markets.
As US stocks plunged close to bear market territory during the first part of the year there were net redemptions of US equity ETFs, but these were offset by inflows of EUR 3.15 billion in May when the market recovered.
As recently as June this year, a longer-term rotation away from US stocks seemed possible as fund flows into European stocks eclipsed those to their US peers.
Between April and June, investors poured more than EUR 20 billion into European equity ETFs across Morningstar Categories, including Europe emerging markets equity, Europe equity large cap, and Europe equity mid/small cap.
Tariff-induced fear and political concern weren’t the only reasons. Europe offered significant investing opportunities amid falling interest rates on the continent, where inflation is close to the European Central Bank’s 2% target. Many European sectors were undervalued, looking attractive to investors seeking to diversify away from US-dominated technology stocks trading at less favorable valuations.
Investors Return to US Stock ETFs
However, the souring on US stock stocks has proven short-lived.
In the background, Trump’s tariffs have not proven quite as damaging as investors had feared and expectations of a Federal Reserve interest rate cut also lifted sentiment around US stocks.
As soon as the US market bounced back, European investors also returned. In July, EUR 2.4 billion went into US equity large cap blend ETFs, followed by August’s EUR 5.2 billion take. Meanwhile US equity large cap growth ETFs took in nearly EUR 1.4 billion, a six-month high and up from EUR 1.3 billion in July.
That contrasts with Europe equity large cap ETFs, which attracted just EUR 1.4 billion in August, down from EUR 3.1 billion in July and down from their inflow of EUR 8.9 billion recorded in March. However, there is a silver lining for European stock ETF flows when compared with lower levels of investor interest in 2023 and 2024.
“Yes, inflows into the US are back, but the inflows to Europe are still continuing, and the relative size of the inflows into Europe is still significant, given its representation in the global index,” says Morningstar’s Field.
US Still a Stronger AI Play Than Europe
US stocks’ attractiveness is still anchored in sound fundamentals, according to Nicolo Bragazza, associate portfolio manager at Morningstar Wealth.
“Although talk of fading US exceptionalism has raised doubts around the US and its economy, especially in the first month of the year, we should not forget that US companies remain fundamentally strong and well placed to lead on some of the most exciting innovations,” he says.
“Investors are looking for growth opportunities and they find that US companies still retain upside potential given its place in the AI revolution and how critical its companies are for it.”
Kenneth Lamont, principal for manager research at Morningstar, says AI is still “fundamentally a US story.”
“Despite Europe being the largest market for thematic AI funds, there are few pure play AI stocks in the region,” he says.
“Beyond ASML … European representation drops off quickly. For example: 22 of the 25 most frequently-held stocks in thematic AI funds globally are US companies. Among these, the Magnificent Seven dominates, with even the least popular Apple appearing in more than 50% of AI-focused portfolios.”
For those deciding where to put money, the dominance of the US in global indexes makes for a magnetic pull.
“If you’re an asset allocator, you might, tweak your exposures, you might sell some down, and go from being an overweight to neutral, or even an overweight to perhaps a small underweight,” says Christopher Mellor, head of EMEA ETF equity product management at Invesco.
“But every time you get more assets coming in, you’re going to have to invest them, and that means you’re going to have to buy US equity products. Perhaps not quite as rapidly as you’re buying Europe, relative to size. But you’re still going to be deploying it.”
European Equity Outperformance Has Lost Momentum
Europe’s recovering stock markets were one key element of the rotation narrative. This argument was based on investors following the momentum of European stocks, which fell less sharply during the April selloff than US stocks, and also recovered more rapidly.
At the midpoint of the year, European stocks were outperforming their US rivals. Recently, US stock markets have started to power ahead again, however, hitting record highs in September. As a result, European outperformance now appears to be losing momentum.
