Federal Reserve Chairman Ben Bernanke’s comments last month that the central bank could soon begin tapering its bond purchases triggered a sea change in financial markets and investor sentiment.
The taper talk also generated a huge shift in ETF flows as investors dashed away from asset classes that have benefited in recent years from Fed quantitative easing and short-term interest rates near zero.
In particular, investors have been fleeing ETFs tracking gold, emerging markets and longer-duration bonds.
“Exchange traded products are a very good indicator of what’s happening in the market,” said Raj Seshadri, BlackRock Head of ETP Insights, in a call with reporters Tuesday.
Since May 22 when Bernanke first indicated the Fed could scale back its bond-buying program, investors have decided to sell a wide range of assets and markets around the world have seen elevated trading volume, she said.
ETFs accounted for 31% of all trading volume in U.S. equity markets in June, up from a range of about 20% to 25% in recent months, according to BlackRock, which manages the iShares ETFs.
With the 24-hour news cycle moving markets, more investors are using ETFs to trade a wide array of sectors, Seshadri noted.
Next page: Investors unwind crowded trades with ETFs
On a global basis, emerging market equity ETFs saw redemptions of $6.6 billion in June, the fifth consecutive month of outflows. In February, concerns over economic growth in China and other emerging markets came to the forefront and equity ETPs for developing markets began to see outflows which have continued through June and now total $10.4 billion so far this year.
Conversely, investors continue to favor developed market stock ETFs such as funds tracking the U.S. and Japan.
Fixed-income exchange traded products in June experienced monthly outflows for the first time since December 2010, although investors did buy products with shorter durations as rates rose.
Also, gold ETFs saw redemptions of $4.1 billion in June as inflation fears cooled, taking year-to-date outflows to $28.2 billion, according to BlackRock.
The recent change in tone from the Fed has caused an “unwinding” of investor behavior from the last few years, especially in gold and bonds, and emerging markets to a lesser extent, said Russ Koesterich, BlackRock Chief Investment Strategist, during Tuesday’s conference call.
And within U.S. stocks, there has been a recent reversal in “crowded trades” such as real estate investment trusts (REITs) and utilities that some investors have used as “bond market proxies” as they stretched for yield, he added.
These trend shifts are due to a change in sentiment surrounding the Fed, the strategist said. Most investors came into 2013 expecting rates to rise, but the perception on the timing of the event has suddenly moved forward due to Bernanke’s comments.
“The selling of bonds has pushed interest rates up rather abruptly,” Koesterich said.
As a result, investors have also sold ETFs that track rate-sensitive sectors such as gold, long-duration bonds, emerging markets, REITs and utilities.
Specifically, gold is “hypersensitive” to changes in inflation-adjusted real rates, which impact the opportunity costs of owning the precious metal, Koesterich pointed out. Real rates have been negative the past few years, which is “highly unusual.” Yet he still thinks gold is a “strategic asset class” that investors may own as a small slice of their portfolio.