Sell in May" Theory Confirmed with $19B in Equity ETF Outflows

“Sell in May” saw investor capital go away from equity exchange-traded funds (ETFs) during that month. It was the largest monthly outflow in history for equity ETFs, which reached a record $19 billion, according to a State Street Global Advisors Report.

With the outflows in equity ETFs, the money was mostly sucked up by fixed income ETFs as investors sought refuge in safe haven assets.

“Global equities were tweeted into a tailspin,” said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, in a note.

“In May, selling was once again concentrated within the cyclical, economically sensitive segments of the market: Financials, Technology, Industrial Materials and Energy,” Bartolini added.

Other highlights from the report:

  • Fixed income ETFs attracted nearly $7B in May, posting their 46th month of inflows out of the last 47;
  • Investors shunned US-focused ETFs in May—the more than $15B of outflows ranks May as the 8th worst month for US geographically-focused ETFs dating back to 1998
  • Emerging market ETFs witnessed almost $2B of outflows during the month, the first time EM has seen outflows since October 2018
  • Within fixed income, high yield ETFs saw a reversal of their year-to-date trend, as the segment posted $3B in outflows in May.  Less equity sensitive sectors, including government and aggregate ETFs, experienced $5.6B and $5B of inflows respectively.

A volatile May no doubt elicited a risk-off sentiment that permeated throughout the capital markets, causing high-yield bond funds to experience record outflows. Furthermore, with bond market mavens warning investors of headwinds in the fixed income space like the possibility of inverted yield curve, rising rates and BBB debt sliding out of investment-grade, investors need to be keen on where to look for opportunities to hide away when markets head downward.

One place is in investment grade debt and here are three ETFs to consider.

  1. iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ): CSJ tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index where 90 percent of its assets will be allocated towards a mix of investment-grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years–this shorter duration is beneficial during recessionary environments.
  2. iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD): LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.
  3. ProShares Investment Grade—Interest Rate Hedged (BATS: IGHG): IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index with long positions in investment grade corporate bonds issued by both U.S. and foreign domiciled companies. This is particularly important during market downturns when the propensity for a company to default on its debt is higher. As such, IGHG focuses on investment-grade issues to reduce credit risk.

For more trends in fixed income, visit the Fixed Income Channel.