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Equity ETFs Post First Outflows in Two Years

Traders Magazine Online News, March 21, 2018

John D'Antona Jr.

Egads. The sky is falling…

Well, not exactly but for ETFs the sector recorded its first month of outflows, shrinkage, in two years as equity investors pulled money out of the sector. Conversely, fixed income ETFs experienced their 32 straight month of inflows and interest.

Fears of rising interest rates and inflation expectations jolted markets and led US-listed ETFs to post $10 billion of outflows in February – the industry’s first monthly outflow since February 2016, according to data recorded by State Street Global Advisors.  The pullback in money was led by equity ETFs which saw outflows of $12.4 billion as investors re-rated stock valuations to reflect the new reality and the market’s exuberant sprint in January. Fixed income ETFs saw inflows of $1.6 billion in February.

“Global equity markets ran at a breakneck pace in January, registering the best start to a year since 1994. Unfortunately, investing is a marathon and not a sprint, and the downside of moving that fast is that any misstep – no matter how small – can often lead to big trouble,” said Matthew Bartolini, Head of SPDR Americas Research at SSGA. “Indeed, as the calendar flipped to February the markets’ momentum made it difficult for investors to see the oncoming risk in the course ahead.” 

In looking at equities, Bartolini said that equities had gained too much too fast, as nearly 40% of the stocks in the S&P 500 Index were in overbought territory. Valuations, he added, were stretched, and an uptick in inflation expectations sent the US 10 Year yield to four-year highs. “Investors naturally re-rated stock valuations to reflect the new reality and the exuberant sprint turned into a stumble,” he said, “And the stumble was contagious.” 

Against this backdrop, looking on the sector level, Materials led the pack, attracting $995 million in February. Investors also returned to betting on proven winners like Technology and Financials, which attracted $950 million and $930 million, respectively.    

Bartolini said the month of February all told was OK despite the outflows in equities and modest inflows via fixed income. He pointed out that most of these outflows were precipitated by the early February month sell-off, however. Roughly halfway through the month, on February 16, equity funds were in outflows of $25 billion and fixed Income funds had seen outflows of $900 million. By month end, equity funds had clawed their way back, closing the month out with just $12 billion of outflows.

Whew.

While equity funds posted $12 billion of outflows in all, the regional story was far more mixed. US equity funds saw $22.5 billion in outflows as investors paired back risk, and likely removed some of the embedded home bias in portfolios since US exposures represent 70% of all equity ETF assets.

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