Where’d The Money Go Last Week?

Submitted by DataTrek Research

Whenever equity markets hit an air pocket, as they did last week, we like to review US-listed exchange traded fund money flows. These come out daily, with a one-day lag, and offer a detailed look at where capital is moving in real time. While it is not a complete picture – mutual fund, hedge funds and retail are much less transparent – over the years we have found that ETF flows are a reasonable proxy for investor sentiment.

First, here is the top-of-house data (all ETF money flow information courtesy of www.xtf.com):

  • For the 5 trading days through Thursday’s close, ETF investors redeemed $8.1 billion. That compares to weekly average inflows of $3.5 billion in 2019. Last week’s volatility therefore had the effect of reversing just over 2 average weeks of inflows. Notable, but not dramatic.
  • Equity funds bore the brunt of the redemptions, with $7.6 billion of outflows. Average weekly inflows so far in 2019 are $1.3 billion. That means last week’s outflows reversed almost 6 weeks of typical 2019 inflows. Dramatic, in our book, but not yet severe.
  • Fixed income ETFs saw inflows last week of $994 million. This is just shy of half the YTD weekly run rate of $2.1 billion. A modest slowdown, in other words.
  • Precious metals ETFs had $545 million of outflows last week, almost 7x the average weekly redemptions ($80 million) so far this year. As with equities, that is a dramatic increase in outflows.
  • Volatility-linked funds saw $549 million of outflows, a sharp reversal from average weekly inflows of $140 million. Given that there is just $3.8 billion in total assets under management here, vol funds clearly saw the worst of last week’s flows on a relative basis.

As for where that $7.6 billion of equity outflows came from:

  • Most of it was out of US equities: -$6.7 billion
  • The next largest chunk came from non-US developed economy markets: -$1.0 billion
  • Emerging market equities actually saw small inflows: +$103 million

One notable development – the S&P500 ETF, better known as the SPY, saw outflows every single day this month!

Why this matters: while EM dramatically underperformed last week (-5.1% vs. -2.2% for the S&P), ETF investors did not throw in the towel. From a market sentiment standpoint, that’s not great news. You would want to see EM equity holders shove their way out of the asset class to signal a near term bottom. And we don’t have that yet.

Now, here is some color on the $944 million of fixed income inflows:

  • ETF investors moved up the credit quality spectrum last week, with $816 million of outflows from junk-grade debt but $1.1 billion of inflows into investment grade corporates.
  • They also shortened maturities on a relative basis, adding $983 million to funds with 0-5 year paper but just $179 million to ETFs +20 year average maturities. Both are notable departures from YTD weekly trends.

Why this matters: ETF investors are not just rethinking equity portfolio allocations – they are also reducing duration risk and improving the credit quality of their fixed income exposure.

Finally, a selection of US equity market cap-related and sector flows from the last week:

  • Almost all the $6.7 billion in US equity outflows came from large caps ($6.6 billion). Mid caps saw $374 million of inflows and small caps had $1.0 billion of outflows. The balance was inflows into multi-cap funds.
  • Technology saw $333 million of inflows, but this could easily have been hedge fund demand for shares to short against pre-existing single stock long positions. Almost all ($319 million) of this came from the creation of new XLK shares, the S&P 500 Tech sector ETF.
  • Financials had $537 million of outflows, which makes sense considering hedge funds don’t typically play in this space so there would be less demand for ETF-based hedges.
  • Health Care ETFs had $392 million of inflows – another sector with active hedge fund interest so hedging demand was likely high.
  • Real Estate saw outflows of $348 million last week despite outperforming the S&P 500 with a 0.77% decline.

Summing up our thoughts on this weekly flow data: last week’s market volatility clearly pushed ETF investors to de-risk portfolios, but the flow data doesn’t suggest widespread panic just yet. As we have noted in past write-ups, ETF flows have gone from reliably strong to choppy in the last 6 months. As such, last week’s redemptions look more normal than they would have just 2-3 years ago. Despite equity flows turning negative, there’s nothing here to signal a near term low for market sentiment.


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About The Author

Tyler Durden

Zero Hedge's mission is to widen the scope of financial, economic and political information available to the professional investing public, to skeptically examine and, where necessary, attack the flaccid institution that financial journalism has become, to liberate oppressed knowledge, to provide analysis uninhibited by political constraint and to facilitate information's unending quest for freedom. Visit https://www.zerohedge.com

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