That said, there is obviously a ton of interested, and available assets on the sidelines that were previously invested in funds including EEM (iShares MSCI Emerging Markets) and VWO (Vanguard Emerging Markets) for existence, as well as EFA (iShares MSCI EAFE) for example, and as market participants feel more confident in terms of direction in this market, they very well will reach for higher beta segments of the the equity markets, which typically includes Emerging Markets (the BRICs of course) and will likely include U.S. Technology and Financials sectors as well in the near term.
The VIX spent the latter part of the week parked below its 200 day moving average, after peaking earlier in the week as high as $27.73, and a decline here would certainly make equity bulls sleep easier at night. Similarly, after what nearly resembled a run on longer dated U.S. Treasury Bonds going into last week occurred, as we saw TLT (iShares Barclays 20+ Year Treasury Bond) peak as high as $130.38 just 6 trading sessions ago, yields raced higher to end the week as Treasury bond prices largely caved in on heavy trading volume in the underlying ETF products and the bonds themselves. This sudden “reversal” in an end of May flight to quality, is also a potential signal that there may be some “relief” for equities in the near term as we approach the summer.
In signs that there was a swift reversal to the recent trend of “de-leveraging” and “risk off” in institutional portfolios, last week, the fund flows leaders in terms of inflows were as one would expect, largely the higher beta names including Technology, Small Caps, and Emerging Markets. Specifically, QQQ (Powershares QQQ Trust) took in more than $1.1 billion alone after several weeks of steady cash outflows, followed by IWM (iShares Russell 2000) and VWO (Vanguard Emerging Markets) with collectively $1.4 billion in inflows via creation activity.
Lightly traded IFGL (iShares FTSE EPRA/NAREIT Developed Real Estate Ex-U.S.) also had a monster week, netting nearly $400 million in asset inflows on trading volume that dwarfs any activity previously occurring in this fund’s history. Additionally, XLF (SPDR Financials), another “higher beta” sector that has trailed the broad market lately, but is still net outpacing the S&P 500 year to date (XLF up 8.68% YTD versus S&P 500 up 6.07%) also took in assets, to the tune of about $350 million. There were some positive asset inflows however into a handful of more conservative fixed income ETF products as well last week, which likely is an indication that some are still concerned that equities have more downside. BSV (Vanguard Short Term Bond), TLT (iShares Barclays 20+ Year Treasury Bond), BND (Vanguard Total Bond Market), and AGG (iShares Aggregate Bond) also were among the leaders in net creation activity last week, reeling in $1.2 billion.
On the other side of the equation, SPY led all ETFs in terms of net redemption activity, losing more than $2.2 billion. It is possible that institutional managers reallocated a considerable amount away from the S&P 500 benchmark index and into higher beta, or riskier segments of the market such as some of the aforementioned funds (Emerging Markets, Small Caps, etc.). Several Vanguard funds that recently saw heavy creation activity that we highlighted on previous weekend recaps actually experienced large net outflows last week, including VB (Small Cap), VO (Mid Cap), VBK (Small Cap Growth), VTV (Value), VBR (Small Cap Value), VUG (Growth), losing a total of more than $3 billion during the week.
Going into this week, all eyes will be focused squarely, unfortunately but inevitably, on any repercussions that arise from Greece’s Sunday elections that may influence the country’s stay or departure from the Eurozone. From a technical standpoint, market observers will watch the SPX closely to see if momentum from recent sessions continues, and it would also be encouraging for bulls to see a relative strength leader that had previously lost a ton of steam in the month of May (Technology, see QQQ and primarily top component weighting AAPL) break out of its recent funk and re-assume its leadership of the market that it displayed during the first 3 to 4 months of 2012.
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