A quick glance at headlines the last few days tell a grim story for ETFs. Numerous articles have reported “record outflows” and investors “fleeing ETFs” and so forth. But despite the dire stories, ETF flows in August were not as bad as they seem – and more importantly they offer valuable insight into what investors are thinking these days.
First, let’s put the flows in perspective. The global ETF industry did experience outflows of $15 billion in August – the second month of outflows this year, and the largest monthly outflow on record for ETFs. However, as the Wall Street Journal recently pointed out, records aren’t what they used to be. With ETF growth continuously on the rise, the denominator for these outflow months keeps getting bigger. For example, the second largest month of outflows on record, $13.4 billion in January 2010, represented 1.2% of total ETF industry assets, whereas last month’s $15 billion in outflows represented just 0.7%.
Still, a month of record outflows is notable, and not exactly surprising given all the uncertainty around economic growth, Federal Reserve policy and unrest in the Middle East. August redemptions were mostly driven by equity ETFs, which lost $9.4 billion, and in particular US equity ETFs, which lost $14.5 billion. Fixed income followed suit with $5.3 billion in outflows, including $8.1 billion in outflows from funds with longer maturity profiles.
At first glance, it would seem investors were taking a risk-averse stance by ditching stocks. But if you exclude significant flows out of the SPDR S&P 500 ETF (SPY), which was hit with $14 billion in redemptions, then total US equity outflows were modest at -$0.5 billion. In addition, there was some positive news on the equity front, with the Eurozone’s first economic expansion in 18 months driving European equity ETF flows to an all-time high of $4.7 billion.
This suggests that investors weren’t as risk-averse as higher-level data suggested. In fact, there is evidence that August actually experienced a significant increase in risk sentiment. As you can see below, the BlackRock Equity Risk Sentiment Measure* rose to a 10-month high in August, despite the fact that there were equity outflows.