Using exchange traded fund flow data to gauge the sentiment of investors is problematic because of the various groups who use ETFs and the many strategies in which they’re employed.
For example, many institutional investors use the $97.8 billion SPDR S&P 500 (NYSEArca: SPY), the largest ETF, to park assets in the stock market while they are making portfolio shifts.
“They are not using ETFs as investing instruments in the same manner as individuals. They hold the instruments for much shorter time frames, and they can affect the size of the funds by hundreds of millions of dollars at a time,” writes Paul Justice, director of North American ETF research at Morningstar, in a newsletter sent to subscribers this week.
Buying and selling patterns in SPY can also be distorted by seasonal effects such as at year-end when investors are making moves for tax purposes.
“Unfortunately, those of us who analyze fund flow data are plagued by the problem of not knowing who owns these ETFs. Many of these purchases are transient in nature, made by market makers, high-frequency traders, and institutions putting cash to work either temporarily or permanently,” Justice notes.
ETFs are baskets of securities that combine the diversification of mutual funds with the ease of trading a single stock. Investors also like their relatively low fees and transparency.