If there’s one thing we all know about markets, it’s that they move quickly and all it takes is one headline to change momentum. This has never been more true than in the third quarter, and it’s one of the reasons I take time every month to review what happened in the markets and how investors used ETFs to respond to shifting conditions.
In this new series of “Flash Flows” blogs, I’ll review monthly ETF flows and highlight key takeaways that you can use to help investors spot trends and respond to market moves in a timely manner.
We saw August’s market turmoil spill over into September as investors fretted not only over the implications of China’s stock market rout, currency devaluation and economic slowdown, but also over the fate of interest rates as the Federal Reserve (Fed) met to decide whether to raise rates for the first time in nearly 10 years.
Investors were left feeling as if they were waiting for Godot because the Fed’s much-anticipated rate rise never happened and the lack of action put the markets into what some are calling “policy purgatory.” The Fed’s decision not to raise rates in September exacerbated the fragile state in which markets have existed since China devalued the yuan. As a result, investors experienced the worst quarter in four years, with $11 trillion wiped off the value of global stocks in the third quarter.1
Here’s a closer look at how headlines shaped September’s ETF flows:
Despite down markets and volatility, flows rolled in
As markets fell, investors sought buying opportunities to deploy record amounts of cash sitting on the sidelines.2 As illustrated by the “September 2015 Asset Category ETF Flows” chart below, by the end of September, $9.41 billion had landed in US equity ETFs and $9.73 billion went to fixed income funds. In total, despite the rockiest three-month period since 2011, almost $44 billion flowed into US-based ETFs during the third quarter with the overall ETF industry standing at $144 billion of inflows for the year.
Source: Bloomberg, State Street Global Advisors, as of 9/30/2015
USA! USA! USA!
The upward revision of the US economic growth rate in the second quarter, combined with contraction in China and tepid growth in Europe, led to a resurgence of interest in US exposures in September. US-focused equity ETFs attracted just under $10 billion of net inflows for the month while investors pulled funds out of global, currency hedged and international funds.
Currency hedged funds have dominated equity ETF investments in 2015 with more than $45 billion in net inflows. However, the heavy rotation to US equity ETFs during September put them on par with inflows to currency hedged funds over the last six months.
De-risking in Health Care and Financials
As the market volatility and negative sentiment from August bled into September, several sectors saw waves of selling as investors reduced tactical positions.
As depicted by the “September 2015 Equity Sector ETF Flows” graph below, Health Care ETFs, which had seen the highest inflows and best performance within equity categories so far in 2015, saw outflows of more than $600 million during the month, reducing year-to-date asset gains to $9.23 billion. Selling was prompted by profit taking as well as a tweet by Democratic presidential candidate Hillary Clinton that indicated her concerns of price gouging by biotech companies. Financials, which tend to sell off in times of high market volatility, saw the largest asset reduction in all ETF equity sectors with outflows of $881 million.
Source: Bloomberg, State Street Global Advisors, as of 9/30/2015
Government and corporate bonds in, high yield out
Volatility and uncertainty had investors seeking high quality segments of the bond market in fixed income ETFs, specifically aggregate, treasury and corporate bond funds. Government bond funds had the largest inflows in the fixed income sector for the month with a gain of $5.69 billion, roughly equal to one-third of the total inflows into these types of ETFs year-to-date.
Investments were placed across all maturities on the yield curve with a slight preference for short and intermediate term funds. Corporate bond funds saw deposits of $502 million, reversing the outflow trend of the prior six months. The push to reduce fixed income risk over the course of the month took the heaviest toll on high yield ETFs, which saw outflows of $928 million. Spread levels are now at their highest in three years at nearly 630 basis points. Meanwhile, expected defaults remain below historical averages.
Looking Forward
While the wild ride of the third quarter is in the rearview mirror, we may be stuck with this notion of policy purgatory and its effect on the markets for a bit longer.
Softer-than-expected payroll growth in September may keep the Fed cautious, while the Eurozone’s inflation rate dipped below zero, fueling speculation of more quantitative easing from the European Central Bank. In Japan, “Abenomics” still has a tough road ahead as the nation struggles with low growth, and we may see China enact further stimulus as manufacturing data still points toward economic contraction.
To keep up-to-date on what SSGA is seeing in ETF flows, be sure to subscribe to SPDR Blog and check back in monthly for follow my monthly “Flash Flows” blog posts.
Definitions
A fund that employs a currency hedge strategy, which is the act of entering into a financial contract in order to protect against unexpected, expected or anticipated changes in currency exchange rates.Yield Curve
The yield curve, also known as the “term structure of interest rates,” is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest.
Fixed Income Risk
Risk attributed to investing in Fixed Income securities.
Spreads
Credit spreads are the difference in yield between any type of bond, and a US treasury of the same maturity. Corporate bonds, which carry a risk of default, yield more than US Treasury Bonds, which carry no risk of default.
Abenomics
Abenomics refers to the economic policies advocated by Shinzō Abe since the December 2012 general election, which elected Abe to his second term as prime minister of Japan. Abenomics is based upon “three arrows” of fiscal stimulus, monetary easing and structural reforms.
1Bloomberg, as of 9/30/2015
2Bank of America/Merrill Lynch Global Fund Manager Survey, as of 9/15/2015