ETF Trends
ETF Trends

Global stock and bond markets bounced back from a summer slump to rally in October, putting the ETF industry on a record-setting course with over $173.9 billion of inflows through the end of the month.

After posting two consecutive months of declines, the MSCI ACWI Index staged its biggest rally in four years, rising 7.7%. The US rally was even stronger, with the S&P 500® Index gaining 8.3%. The move allowed the S&P 500 to sneak back into positive territory after being down more than 9% at its August low.1 The buying action was stoked by strong earnings reports in the Technology and the Health Care sectors. In Health Care, 86% of firms reported earnings that were higher than expected.2

Outside the US, global stock exchanges joined the rally. The EURO STOXX 50® Index gained 9% and China’s CSI 300 Index returned 11% due in large part to the willingness of central banks in the regions to follow accommodative monetary policies—both forecasted and enacted.3

October also saw high yield bonds break a slump that had pushed credit spreads to 130 basis points (bps) above their five-year average. The last time credit spreads were that wide was in the summer of 2012 at the peak of the European sovereign debt crisis. With a newfound appetite for risk, investors jumped in, tightening spreads by 70 bps by the end of the month.4

Here’s a look at how ETF flows shaped up in October:

Investors pile in to equity ETFs

With equities in “risk-on” mode and posting near double-digit returns in some regions, investors followed the trend and allocated capital to all but one segment of the ETF market. As displayed in the “October 2015 Asset Class Flows” graph below, equity inflows were almost $16 billion, while more than $11 billion went to fixed income funds. For the month, 98% of inflows went to equity and fixed income ETFs, with commodity, alternative and specialty funds taking in the remaining 2%.

Source: Bloomberg, State Street Global Advisors, as of 10/30/2015

 

The home team takes it

Over the last six months, US funds have amassed nearly four times as many assets than the upstart currency hedged ETF category. It appears the currency hedged trade still exists but may have waned from its early year torrid pace when the dollar rallied 8% through the first quarter.5

Source: Bloomberg, State Street Global Advisors, as of 10/30/2015

 

Faith in the US consumer drives sector flows

As depicted in the “October 2015 Equity Sector ETF Flows” graph below, consumer-related sectors added a combined $2.1 billion in October. Consumer staples took in $1.5 billion while just under $700 million of flows went into consumer discretionary funds. Tech funds gathered $1.2 billion, getting back on the positive side of the inflows ledger for the year. Health care ETFs, despite a steady flow of companies in the sector beating earnings estimates, had outflows during the month due to ongoing political rhetoric and single stock news.

Source: Bloomberg, State Street Global Advisors, as of 10/30/2015

 

Fixed income investors swap safety for risk

As appetites for risk increased across the board, investors traded out of government bond ETFs (except for the long end) to the tune of around $1.1 billion. Investors sought out contrarian opportunities presented by corporate bond funds, which had been under pressure for the last few months. In total, $8.3 billion went to corporate bonds, with inflows of $5.2 billion to high yield ETFs and $3 billion to investment grade funds.6

Looking Forward

The Federal Reserve (Fed) declined to raise interest rates in October, but Chair Janet Yellen said earlier this month that a rate increase in December is a “live possibility” if economic data continues to indicate the US economy is performing well.7 Following this month’s stronger-than-expected jobs report the futures market is now placing the probability of a December rate hike at 68%, up from 30% in mid-October.8

Prior to the December Fed meeting, there will be one more checkup on the labor market and two more third-quarter GDP revisions. Investors should take the time now to position accordingly as the likelihood of an interest rate hike increases.

To keep up-to-date on what SSGA is seeing in ETF flows, be sure to subscribe to SPDR® Blog and check back next month for the latest installment of my “Flash Flows” blog posts.

Definitions

MSCI ACWI Index
The MSCI ACWI Index is a free-float weighted equity index and includes both emerging and developed world markets.

S&P 500 Index
The S&P 500, or the Standard & Poor’s 500, is an index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

EURO STOXX Index
The EURO STOXX 50 Index, Europe’s leading blue-chip index for the Eurozone, provides a blue-chip representation of supersector leaders in the Eurozone. The index covers 50 stocks from 12 Eurozone countries.

1State Street Global Advisors, Bloomberg, as of 10/30/2015
2State Street Global Advisors, FactSet, as of 10/30/2015
3State Street Global Advisors, Bloomberg, as of 10/30/2015
4State Street Global Advisors, Bloomberg, as of 10/30/2015

5State Street Global Advisors, Bloomberg, as of 10/30/2015
6State Street Global Advisors, Bloomberg, as of 10/30/2015

7CNBC.com, “Janet Yellen: December rate hike a ‘live possibility’,” as of 11/4/2015
8Bloomberg, as of 10/30/2015