Feb ETF Market Jolted by Coronavirus, March Next

While the broad equities market has been pummeled by COVID-19 fears and huge index losses, exchange-traded funds have held up somewhat better despite ouflows.

In the latest survey month, State Street Global Advisors noted intra-month equity ETF inflows represented approximately $29 billion before fears around the Coronavirus rattled markets and spurred a violent reversal in trend and investor sentiment, as equity ETFs closed February with $650 million in outflows. Similarly, high- yield bond ETFs experienced $4.6BN in outflows and registered outflows of more than $1 billion on four consecutive days as investors de-risked.

The S&P 500 Index fell 11% in the last five days of the month, Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, explained, noting it notched (at that time) a new record for the fastest correction ever. “In those five days, there were three days with more than a 3% daily decline – the most for a five-day period since the US’s sovereign debt rating was downgraded in 2011.” By the end of the month, he added, only 3% of US stocks were trading above their 50-day moving average, with 12% of stocks trading above when considering a global universe. This compares to 70% and 50%,2 respectively, from mid- month – evidence of the massive reversal of sentiment stemming from the uncertainty of the Covid-19 epidemic’s impact on global growth.

Matthew Bartolini, State Street Global Advisors

“While I do not believe a rate cut will stem the spread of Covid-19, it will lower the cost of capital and free up more money in the system to offset the business impact from a shift in consumer behavior,” Bartolini said. “Even with a rate cut, however, expect more volatility in the days ahead as the uncertain nature of the virus’s impact is not transitory and will have noticeable impacts for 2020 economic and fundamental trends. A recession is unlikely, but so is getting back to 3% GDP growth in the US – or even 2%.”

On the plus side and direct beneficiaries as the exodus from equities and equity-backed products accelerated, fixed-income ETFs have now amassed over $32.4 billion of inflows year-to-date and are on pace to shatter 2019 records. Also, gold ETFs attracted $2BN during the month amid rising uncertainty.

“If it weren’t for the $6 billion of outflows from credit-sensitive sectors, fixed income ETFs would have surpassed $20 billion in monthly flows for the second time ever,” Bartolini said. “The demand this month was part secular, as discussed here and part market-related, given the drawdowns in stocks.”

And looking to these last two weeks where the Coronavirus has tortured the stocks markets, the Investment Company Institute reported that for its latest survey week, March 4, the estimated value of all exchange-traded fund1 (ETF) shares issued exceeded that of shares redeemed by $350 million for the week ended March 4. They reported equity ETFs had estimated negative net issuance of $6.34 billion for the week, compared to estimated negative net issuance of $13.52 billion in the previous week. Domestic equity ETFs had estimated negative net issuance of $3.46 billion, and world equity ETFs had estimated negative net issuance of $2.88 billion.

Hybrid ETFs, which can invest in stocks and fixed-income securities, had estimated net issuance of $35 million for the week, compared to estimated net issuance of $15 million in the previous week.

Bond ETFs had estimated net issuance of $6.34 billion for the week, compared to estimated net issuance of $1.11 billion during the previous week. Taxable bond ETFs saw estimated net issuance of $6.43 billion, and municipal bond ETFs had estimated negative net issuance of $87 million.