After a tumultuous start to the year, exchange traded fund investors have been easing back into the riskier segments of the market, focusing on income generation and some more defensive strategies that may keep the edge off their stock plays.
The SPDR S&P 500 ETF (NYSEArca: SPY) was on track to become the most popular play of April, attracting $1.8 billion in net inflows for the month through Thursday, according to ETF.com data. SPY, the largest ETF and first U.S.-listed ETF to hit the market, has the most liquid options market of any ETF and tight bid-ask spreads, attractive attributes that has helped the fund attract a large institutional following.
The Vanguard 500 Index (NYSEArca: VOO) also brought in $870.9 million this month. While not as active as SPY, VOO has been attracting more long-term investors as the Vanguard option comes with a cheap 0.05% expense ratio, compared to SPY’s 0.09% expense ratio.
Additionally, ETF investors funneled about $1.2 billion into the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), which selects U.S. stocks based on variances and correlations along with other risk factors, and $547.2 million into the iShares MSCI EAFE Minimum Volatility ETF (NYSEArca: EFAV), which provide a low-volatile option for developed overseas markets.
These low-vol theme have grown in popularity as conservative investors turned to this smart-beta strategy in response to the recent market oscillations. The low or minimum volatility strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy focuses on equities that exhibit lower beta, a measure of volatility or systematic risk of a security to that of the overall market. Consequently, minimum volatility portfolios are constructed with securities that exhibit lower market risk or beta, which help limit drawdowns during market pullbacks.
Stock ETF investors are also warming up to the health care sector, one of the worst performing areas of the market, as a potential value play. The Health Care Select Sector SPDR (NYSEArca: XLV) saw $643.6 million in net inflows. The health care sector may continue to attract investors as merger and acquisition activity picks up, with Abbott Laboratories (NYSE: ABT) recently agreeing to acquire St Jude Medical Inc. (NYSE: STJ) for $25 billion and AbbVie Inc. (NYSE: ABBV) buying Stemcentrx for $5.8 billion.
Additionally, investors still demand income-generating assets. For example, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) added $1.0 billion in net inflows this month, Vanguard REIT ETF (NYSEArca: VNQ) attracted $767.5 million and iShares TIPS Bond ETF (NYSEArca: TIP) brought in $733.3 million.[related_stories]
Yield-generating assets got a new lease on life after the Federal Reserve said it would only hike interest rates two times this year instead of the previously stated four hikes. The return to risk also pushed investors out of more conservative plays and into riskier income-generating assets like corporate debt and real estate investment trusts.