Credit: Shutterstock photoETF fund flows have often been interpreted by investors to signal a turn in sentiment for an asset class or style. A heavy outpouring of money from an ETF is typically viewed as a bearish sign, while accumulation can support a bullish thesis. There is a comfort in this logic that is analogous to investors buying as a fund moves higher and selling as it moves lower.
One of the best places to research fund flows is out at ETF.com. They have a fantastic tool that lets you select individual funds over varying time frames or simply look at the top 10 best and worst on a year-to-date basis. It immediately gives you a lay of the land of where the money is flowing in the ETF industry.
At first glance, the $-24 billion in outflows from the SPDR S&P 500 ETF (SPY) through the first three months of 2018 seems like an impressive capital re-distribution driven by recent equity volatility. SPY has finally entered correction territory after spending nearly two years in a steady uptrend that allowed money to chase stocks higher. It’s no surprise that large asset managers are reducing their next exposure to this market benchmark as the winds begin to change.
As the largest and one of the most heavily traded ETFs in the world, SPY is often at the top of the positive or negative fund flows list. The result of active managers and other market participants quickly adding or reducing index exposure to the stock market to suit their style or risk outlook. Because of its size and daily liquidity, SPY has less utility than other sector or factor ETFs in measuring the sentiment of investor activity. I would analogize it to a large train that is constantly adding and removing passengers as it makes its way to an unknown destination.
Another phenomenon that is often illustrated in fund flow optics is the great cost migration. This is demonstrated by a switch from one fund to another to save on costs or take advantage of tax efficiencies. For instance, this year the iShares MSCI EAFE ETF (EFA) has lost -$6.5 billion in assets, while the iShares Core MSCI EAFE ETF (IEFA) has added nearly $15 billion.
Both funds offer highly diversified exposure to a market cap weighted index of foreign stocks in Europe, Australia, Asia, and the Far East. However, it’s notable that IEFA carries an extremely low expense ratio of 0.08% compared to 0.32% for EFA. Trades involving billions of dollars can save millions in costs over longer time frames just by switching to a similar fund with a lower expense ratio. The switch has a prominent impact on the headline fund flows but does little to disrupt the underlying stocks that each ETF owns because of the similar index construction.
More notable perhaps are those funds that correlate with a specific theme or risk category such as rising interest rates. ETF investors have been dumping funds this year that carry high inverse correlations with Treasury yields. The iShares Investment Grade Corporate Bond ETF (LQD) and Vanguard Real Estate ETF (VNQ) are two examples that top year-to-date outflow list for 2018. Both funds have lost notable assets as investors shed exposure to interest-rate sensitive holdings that have underperformed for the last six months.
Additional standouts this year include the continued confidence in stocks demonstrating momentum characteristics as evidenced by the +$2.5 billion in new money added to the iShares Edge MSCI USA Momentum Factor ETF (MTUM). This smart-beta ETF tracks a subset of U.S. stocks demonstrating above-average performance factors and is unsurprisingly overweight the technology sector currently.
The Bottom Line
While fund flows can help target areas that investors are favoring or avoiding in any given year, they can also contain noisy data fluctuations that are open to interpretation without proper context. Make sure that any analysis of flows includes a comparison of similar funds to create a balanced sample.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
