U.S.-listed ETFs have lost about $17 billion of assets under management over the past 30 days, with emerging market and bond funds leading the outflows.
The past month is “quite a departure from the steady-as-she goes pace of inflows more common to the product,” Nicholas Colas, chief market strategist at ConvergEx Group, said in a note Friday.
“Some asset classes have been harder hit than others, of course,” he added. “Fixed income funds have lost $9.4 billion, and commodity-oriented ETFs have shed $2.9 billion. The biggest bullet thus far has been at the top of the risk pyramid, with emerging markets funds losing $10.4 billion.”
Since the end of May, investors have redeemed $5 billion from iShares MSCI Emerging Markets (NYSEArca: EEM) and $2.1 billion from Vanguard FTSE Emerging Markets (NYSEArca: VWO), according to IndexUniverse data.
Meanwhile, in bond ETFs, iShares Investment Grade Corporate Bond ETF (NYSEArca: LQD) and iShares TIPS Bond (NYSEArca: TIP) have seen the heaviest selling with outflows of $2.4 billion and $2 billion, respectively.
However, Colas doesn’t think ETF selling is impacting their underlying markets.
“We tend to think that these unusually negative flows are more a symptom of recent market unrest than a cause,” he said. In other words, the tail isn’t wagging the dog.
In bond ETFs, even though some funds have grown very large, “they still only represent a very small portion of the [fixed-income] universe, and therefore would not be capable of ‘moving’ the underlying market in a meaningful way,” says Dodd Kittsley, head of global ETP market trends research for BlackRock. [iShares: ETF Mythbusting — Can Bond Funds Move the Market?]
Next page: ‘Making the rivers run red’
Colas points out that ETFs have been controversial products over the years. Indeed, the business has faced increased scrutiny recently after last week’s sell-off. [ETFs: People Fear What They Don’t Understand]
The complaints against ETFs “range from dampening innovation, sucking startup capital away from promising ventures, forcing toxic correlations into capital markets, making the rivers run red, and perhaps a few locusts,” Colas joked.
Despite the last month’s redemptions, U.S. ETFs are still sitting on net inflows for the year.
“U.S. listed ETFs have $1,428 billion in assets under management as of Wednesday this week. For the year, the 1,472 products in this universe have seen their AUM rise by $74.3 billion. The bulk of this increase – $70.8 billion – has come from fresh money rather than capital gains,” according to ConvergEx Group. “Prior to the beginning of May, it was unusual to see U.S. listed ETF lose AUM from redemptions over any given week.”
During that period, ETFs were averaging about $600 million of inflows a day.
“Over the last month, redemptions out of ETFs have been the order of the day. Over that time, the industry has seen $16.9 billion in redemptions, or almost a 20% reduction in what was shaping up to be a record pace of inflows prior to the current market volatility,” Colas wrote Friday.
The strategist attributes the outflows to a change in investor psychology with the Federal Reserve indicating it could pull back on quantitative easing.
“What I take away from the money flow data is that ETF investors have shifted to a wait-and-see mode. Don’t forget that this has been THE go-to investment structure during the entire move higher for global stock markets since the March 2009 lows. The redemptions we’ve noted here aren’t a sign that ETFs are about to lose their popularity. Rather, it is – for the moment at least – a sign that investors are a touch lost in the woods,” Colas said.
“We’ll continue to watch these flows carefully, especially next week as we enter the new quarter,” he concluded. “One thing is for sure – wherever investors start to (re) cluster, they will use ETFs to gain that exposure.”
Full disclosure: Tom Lydon’s clients own EEM, LQD and TIP.