A quick glance at headlines the last few days tell a grim
story for ETFs. Numerous articles have reported "
" and investors "
" and so forth. But despite the dire stories, ETF flows in August
were not as bad as they seem - and more importantly they offer
valuable insight into what investors are thinking these days.
First, let's put the flows in perspective. The global
ETF industry did experience outflows of $15 billion in August -
second month of outflows this year
, and the largest monthly outflow on record for ETFs.
However, as the Wall Street Journal recently pointed out,
records aren't what they used to be
. With ETF growth
continuously on the rise
, the denominator for these outflow months keeps getting bigger.
For example, the second largest month of outflows on
record, $13.4 billion in January 2010, represented 1.2% of total
ETF industry assets, whereas last month's $15 billion in outflows
represented just 0.7%.
Still, a month of record outflows is notable, and not exactly
surprising given all the uncertainty around economic growth,
Federal Reserve policy and unrest in the Middle East.
August redemptions were mostly driven by equity ETFs, which lost
$9.4 billion, and in particular US equity ETFs, which lost $14.5
billion. Fixed income followed suit with $5.3 billion in
outflows, including $8.1 billion in outflows from funds with
longer maturity profiles.
At first glance, it would seem investors were taking a
risk-averse stance by ditching stocks. But if you exclude
significant flows out of the SPDR S&P 500 ETF (
), which was hit with $14 billion in redemptions, then total US
equity outflows were modest at -$0.5 billion. In addition,
there was some positive news on the equity front, with the
Eurozone's first economic expansion in 18
driving European equity ETF flows to an all-time high of $4.7
This suggests that investors weren't as risk-averse as
higher-level data suggested. In fact, there is evidence
that August actually experienced a significant
in risk sentiment. As you can see below, the BlackRock
Equity Risk Sentiment Measure* rose to a 10-month high in August,
despite the fact that there were equity outflows.
Because the Risk Sentiment Measure takes into account the risk
profiles of securities within a category, it reflects shifts in
risk appetite that are harder to discern from raw flow
data. In other words, in August there were net outflows in
less risky equity ETFs (e.g. broad-based, large cap funds like
SPY) and net inflows in riskier equity ETFs (e.g. European equity
The primary takeaway, as always, is that there's usually more
to the story than what high-level flows illustrate. It's
often necessary to look at both raw flow data and other
information, like the BlackRock Risk Sentiment Measure, to get a
more accurate picture of emerging investor trends.
In the case of August flows, investors appeared to be
cautiously optimistic while also likely
preparing for increased market volatility come September
. With events like the highly-anticipated
, German elections, US debt ceiling negotiations and the
escalating conflict in Syria, the only thing certain about
September is all the uncertainty.
Dodd Kittsley, CFA, is the Head of Global ETP Market
Trends Research for BlackRock and a regulator contributor to
. You can find more of his posts
Sources: BlackRock, Bloomberg
BlackRock Risk Sentiment Measure
The measure is computed by asset class
(e.g., Equity, Fixed Income) and for different time periods
(weekly, monthly, etc.) to reflect shifts in risk appetite that
harder to discern from raw flow data.
To compute risk sentiment within a particular asset class, we
sort ETPs into two groups, high and low risk, based on their
60-day realized return volatility. Risk sentiment is then
defined as the total dollar inflows/outflows for the riskier
group of ETPs less those of the safer group, scaled by the
dispersion in flows across the sample. Zero on the scale below
represents the 1-year moving average. It's important to note
the BlackRock Risk Sentiment Measure considers risk sentiment
Information on SPY is provided strictly for illustrative
purposes and should not be deemed an offer to sell or a
solicitation of an offer to buy shares of the Fund.