Equity and Bond ETF Inflow Plays Tag With the Stock Market

With the S&P 500 index posting a 32% gain in 2013, it’s not surprising that exchange traded funds (ETFs) holding U.S. equities, especially large-capitalization stocks, received the biggest net cash inflow last year.

But with U.S. stocks falling in January, 2014 has seen ETF investors fleeing U.S. stocks and buying such categories as bonds and emerging-market stocks. Amid all this activity, equity ETFs tied to nonmarket-cap-weighted indexes have bulked up.

Despite the stock market rally in 2013, net issuance, or net cash inflow, into ETFs fell 3% to $179.87 billion as investors pulled money out of bond funds, according to the Investment Company Institute. In 2012, fixed-income ETFs posted record annual net inflow of $52.32 billion. But net inflow plunged 77% last year to $12.20 billion as fears grew that the Federal Reserve Bank will soon reverse its quantitative-easing strategy and allow interest rates to rise. Bond prices fall when interest rates rise.
When Federal Reserve Chairwoman Janet Yellen speaks and the markets move, huge sums of money flow between stock and bond ETFs. AP

When Federal Reserve Chairwoman Janet Yellen speaks and the markets move, huge sums of money flow between stock and bond ETFs. AP View Enlarged Image

“One consistent trend for a while is investors have been repositioning their portfolio for the rising rate environment,” said Michael Iachini, managing director of ETF Research at the Charles Schwab Investment Advisory. “They’ve moved out of Treasuries and are investing in short-term debt instruments from high-yield issuers.”

Equity inflow in 2013 grew 26% to $166.84 billion. Of that total, 62% of inflow, or $104.03 billion, went into ETFs holding domestic equities. The rest went into international funds. But that trend reversed in the first two months of 2014.

Broad-based U.S. equity ETFs recorded net outflow of $21.08 billion. SPDR S&P 500 ETF (SPY), which received the most inflow last year, $16.32 billion, posted net outflow of $19.00 billion in Q1 2014, according to BlackRock, which offers iShares ETFs and tracks industry statistics. More surprising was that bond ETFs saw net inflow of $17.64 billion, more than all of last year combined.

“One thing that happened in the beginning of January was that long-term interest rates came down and stabilized,” said ICI senior economist Shelly Antoniewicz. “It turned out the resolution on the debt ceiling wasn’t going to be an issue and people became more comfortable with the Fed’s policy of reducing the bond buying program.”

One of the biggest reversals in asset flow has been in emerging-market stocks. In 2013, ETPs (exchange traded products) holding emerging-market stocks posted net outflow of $10.92 billion, according to ICI. Things really picked up steam this year. In the first two months of 2014, emerging-market ETPs recorded net outflow of $12.58 billion.

For the full story go to Investor’s Business Daily.

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