Sumit Roy, Analyst for ETF.com
What could have been a week of fireworks for the markets ended up being a yawner. Stock and bond ETFs barely budged as two huge pieces of news hit the wires last week, a counterintuitive, but typical, reaction in a year that has seen record-low volatility in financial markets.
New Fed Chair & Tax Plan
The first piece of big news to come out last week was the nomination of Federal Reserve Governor Jerome Powell to be the next chairman of the Federal Reserve.
The second big news of the week was the unveiling of the Republican tax plan. Called the "Tax Cuts and Jobs Act," the bill slashes taxes for corporations from 35% to 20%, consolidates the number of individual tax brackets from seven to four, reduces the cap on mortgage interest deductions, and more.
Despite the pair of important announcements, broad market ETFs like the SPDR S&P 500 ETF (SPY) and the iShares Aggregate Bond ETF (AGG) didn't do much last week.
That lack of market reaction is "a case study in how markets are forward looking," explained Brian Jacobsen, chief portfolio strategist for Wells Fargo Funds Management. "Surprises matter. There was very little that was surprising in what was unveiled."
Watch Muni ETFs
However, Jacobsen suggested that muni ETFs like the iShares National Muni Bond ETF (MUB) may see some action in the coming months given the tax changes that are slated to hit that space.
"The municipal bond market will be the place to look for a reaction, as there are provisions galore that could affect that market. Eliminating the AMT, changing private activity bond income treatment, eliminating stadium bonds, and taxing income on advanced refunding bonds could create some really interesting relative opportunities in that market," Jacobsen said.
IVV The Year's Biggest Winner
Even though markets didn't take much notice of last week's news events, they remained in a bullish mood. The S&P 500 inched to a new record high, and even bonds rallied.
Likewise, investors continued to plow billions of dollars of new money into ETFs. The latest data from FactSet showed that U.S.-listed ETFs had inflows of $54.9 billion in October, pushing year-to-date inflows to an annual record of $385 billion.
The data suggest that investors continue to plow assets into some of the cheapest, most liquid funds, buying into a U.S. stock market that’s surging to new highs in the face of an ongoing global growth story, and expectations of U.S. tax reform.
U.S. equity ETFs saw nearly $30 billion in net creations, with funds like SPY, the iShares Core S&P 500 ETF (IVV) and the PowerShares QQQ Trust (QQQ) leading the haul. The 10 most popular ETFs last month attracted more than $25 billion in combined net assets, roughly half of all the fresh net inflows of $54 billion that U.S.-listed ETFs received in October.
IVV is still holding onto the No. 1 spot as the most popular ETF of the year, attracting net assets of more than $27 billion year-to-date.
International Equity ETFs
Also undeterred is investor demand for international equity exposure focused largely on developed and emerging markets. International equity ETFs have gathered $137 billion in net creations this year, more than any other asset class.
One of the exceptions in this space was the iShares MSCI Spain Capped ETF (EWP), which bled more than 37% of its total assets last month in the face of the ongoing conflict between Spain and Catalonia’s leaders.
Not so popular last month was the iShares 20+ Year Treasury Bond ETF (TLT), which led outflows with net redemptions of $1.34 billion, as investors trim exposure to long-dated bonds ahead of what could be another rate hike before the year is over.
Still, demand for U.S. fixed-income ETFs was generally strong last month. The asset class raked in $8.2 billion in fresh net assets. Ten-year Treasury yields hit a seven-month high during October, but receded somewhat amid uncertainty over who will lead the Federal Reserve going forward.
The prevailing sentiment is that president Trump is likely to nominate Fed Governor Jerome Powell to replace Janet Yellen at the helm of the Fed. If nominated to replace Yellen, it would be the first time since 1979 a Fed Chair wasn't reappointed, according to Reuters.
Total U.S.-listed ETF assets now total more than $3.267 trillion.
Check out the tables below to see the highlights of October's flows:
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