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 industrys 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 markets 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.
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.
When looking at fixed income inflows, Bartolini said that ETFs took in $2.5 billion over the last eight trading days in February, ensuring their 32nd consecutive month of inflows with a total net $1.6 billion haul. While fixed income did manage to eke out monthly inflows, this months figure was markedly below the segments monthly average of $9 billion during this streak.
SSGA reported that interest rate sensitive sectors – Treasuries, Aggregate, MBS, and Inflation Protected – took in net inflows of $8 billion as investors sought to balance out the equity risk within the portfolio during the market selloff. The higher interest rate offered by bonds also made the asset class more attractive relative to equity income instruments, as discussed in the sector section with respect to bond proxies.
The yield curve steepened ever so slightly in February, with 30 year yields rising 19 basis points and 10 year yields rising 16 basis points, Bartolini said. As a result, there was a slight bias towards shorter maturities which added $1.8 billion last month, to bring its trailing twelve month flows to $7 billion. This movement up and down the curve is reflective of investors usage of bond exposures to temper risk, clearly preferring to limit duration risk when moving into bonds as evidenced by the higher allocation to short term exposures.