The majority of month-to-date outflows have been in the fixed income category (-$3.7 billion), offset by developed equity inflows of $6.6bn. We have seen similar suppressed activities in long-term equity mutual funds. As of Oct 9th, equity mutual funds had 2-week outflows of -$3.8bn, whereas bond mutual funds had $0.5bn of inflows. That compares with much more decisive activities last October – equity mutual fund outflows of -$17.0bn and bond inflows of $56.1bn.
As far as the debt ceiling goes, “wait-and-see” investors may not have to wait much longer, since it appears that grudging progress toward deal is being made. However, the fix is likely to be short-term. This “kick-the-can” policy approach essentially ties investors’ hands, since it can be tempting to wait for a resolution before getting back into the market. But if the past year of policy-driven markets has taught us anything, it’s that what we’re seeing now may just be the new normal. And staying out of the market for too long can have potentially negative consequences of its own.
So how are investors using ETFs to stay invested in this new world of uncertainty? On the fixed income side, we’ve seen a massive “duration rotation” this year as many investors prepared for an eventual interest rate hike. Short maturity credit and floating rate notes in particular have been beneficiaries of this trend toward shorter duration funds. On the equity side, within the US equity category we’re seeing more and more people take a tactical approach to sector investing, rotating out of defensives and into select cyclical sectors, such as energy and information technology. We have also seen increased demand for developed market equities outside the US, with a recent strong preference for pan European equity exposure.
Sources: BlackRock, Bloomberg, EPFR
Dodd Kittsley, CFA, is the Head of Global ETP Market Trends Research for BlackRock and a regulator contributor to the The Blog. You can find more of his posts here.