This past week, we saw additional evidence that institutions are concerned about potentially going into the summer overexposed to equities as the leaders in fund outflows were SPY ($-2.3 billion via redemption activity) and EEM (iShares MSCI Emerging Markets) which lost $1.2 billion last week. A related ETF, VWO (Vanguard Emerging Markets) also lost approximately $200 million. We have wondered out loud for several weeks when the seemingly resilient Emerging Markets ETF space, which reeled in more than $8 billion collectively in new assets via creation activity in the first months of the year, would finally crack and this week the selling pressure was evident.
When the equity market looked like it was in unabated bull rally mode back in January of February of this year, conceptually it made sense that Emerging Markets funds such as EEM and VWO would attract significant asset flows given the relative under-performance to U.S. equities in the trailing one year period, and the higher beta nature of these markets. In the trailing one year period, EEM for instance has lost 17.17% versus the S&P 500 up 1.01% during this same time frame. China is the single largest country weighting in EEM, at nearly 18%, and the country’s equity market has notably under-performed other segments of the market, with FXI (iShares China) for instance losing 19.30% in the trailing one year period. After weeks of witnessing protective activity in EEM via put spreads and outright put buying, it was not completely surprising to see some institutions fold their hands at least for now in emerging markets equities, and allocate to other asset classes.
In bonds, a very large trade occurred in SPDR High Yield Bond (NYSEArca: JNK) mid week last week as well, with about $800 million leaving the fund on a single 19 million share block print. [High-Yield Bond ETF Sees Volume Spike]
Given the recent downturn in equities and namely the higher beta segments such as Small Caps, the High Yield Bond market has been surprisingly resilient with JNK and related ETF HYG (iShares High Yield Corporate Bond) actually flirting with multi-year highs. Nonetheless, clearly an institution wanted to cash out of their high yield bond exposure last week in a rather aggressive manner. A handful of equity sector ETFs also spilled out assets last week, namely XLE (SPDR Energy), XLI (SPDR Industrials), and XLF (SPDR Financials, which JPM is the second heaviest weighting in, and clearly that name was all over the news late last week amid news of a $2 billion trading loss for the firm). Collectively, approximately $1 billion flowed out of the funds in total.
In absolute terms, net inflows last week were very small in comparison to outflows, as IWM was the leader across the ETF space, taking in only approximately $300 million during the week (compared to several funds including SPY and EEM for instance losing more than $1 and $2 billion last week via redemptions). Also, in a continuation of flows from two weeks ago, several fixed income names continued to attract new assets amid the recent environment of institutional caution, as SHY (iShares 1-3 Year Treasury Bond)l IEF (iShares 7-10 Year Treasury Bond), and BND (Vanguard Total Bond Market) for instance reeled in close to $400 million collectively.
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