One of the advantages of the ETF world is the abundance of information and research that is available to anyone with an internet connection. ETF data can be found through a variety of resources, however one area that I like to check on every few months is the fund flows section of ETF.com.
This valuable resource gives us insight into the asset flows of top exchange-traded funds. It effectively provides an immediate update on ETFs that are gaining or losing the most assets, which in turn can help guide future investment decisions.
Not surprisingly, the ETFs that garnered some of the biggest flows year-to-date through May 5 are areas of the market that are exhibiting the greatest strength. This continues a trend of investors chasing performance and shifting their asset allocation in favor of new opportunities that are materializing from previously oversold sectors.
While the Vanguard S&P 500 ETF (VOO) tops the list of total inflows with $2.7 billion in new assets, the most notable entry in the top three is the iShares 7-10 Year Treasury Bond ETF (IEF) which has added $2.5 billion this year. The total listed assets for IEF is now at $6 billion, which means that this ETF has nearly doubled its total size just since the beginning of the year.
Treasuries were one of the most hated asset classes coming into 2014 after rising bond yields led to a mass exodus from these securities. In hindsight, intermediate and long-term interest rates reached an inflection point at the end of 2013 and began a steady descent that has lifted bond prices.
This shift may be due to increased volatility in equities this year that has portfolio managers scrambling to rebalance their asset allocation in favor of safe haven or defensive positions. Treasuries are often looked at as a shelter from the storm when stock prices begin to show signs of weakness.
Two sectors that have also received a great deal of attention and new money this year are the Energy Select Sector SPDR (XLE) and the Vanguard REIT ETF (VNQ). These funds have gained $2.3 and $2.1 billion in new money, respectively. Rising commodity prices and a shift to value stocks has been the primary driver of strength in XLE, while VNQ has benefitted from stabilizing interest rates and above-average yields for income hungry investors.
While it may be a topic for another article, I have also noticed Vanguard increasingly tops the list of notable ETF inflows as one of the lowest cost ETF providers. I believe this speaks to a bigger trend of investors becoming more educated and aware of total investment costs on their portfolios. Many are now transitioning to cheaper ETFs in an effort to increase their total return or perhaps replace aging mutual funds as core holdings.
On the flip side, the list of ETFs with top outflows includes a cornucopia of sectors that have experienced higher volatility and uncertain direction this year. The iShares MSCI Emerging Market Equity ETF (EEM) along with the Vanguard FTSE Emerging Market ETF (VWO) have lost a combined $6.6 billion in net assets in 2014. However, it’s worth nothing that these two ETFs have recently arrested this trend and are seeing dollars flow back into these developing overseas markets.
The Consumer Discretionary Select Sector SPDR (XLY) and MarketVectors Agribusiness ETF (MOO) have also lost considerable assets this year. Both of these funds experienced steep declines in the first quarter, and despite some recent stabilization, they are continuing to see investor confidence dwindle.
How you ultimately interpret this data is largely a function of your outlook on the market. Many will see these shifts as a move from more aggressive sectors to defensive names that could align with additional volatility on the horizon.
From a contrary perspective, many of the ETFs that have experienced larger outflows this year may ultimately be funds that rebound stronger as a result of weak hands being shaken out. Those who like to run in the opposite direction of the crowd can use this data to their advantage.