More Investors Are Exiting Cash and Turning Up the Risk

Before Thursday’s 800-point drop in the Dow Jones Industrial Average, capital markets once again had the risk dial turned up with investors exiting their cash positions. Covid-19 certainly sparked a lot of that movement to cash via short duration Treasury exchange-traded funds (ETFs) as a safe haven move, but despite the recent drop, more capital flows into equities could continue.

Per a Bloomberg report, about “$5.4 billion has exited from the $20 billion iShares Short Treasury Bond (SHV) (exchange-traded fund — the biggest ultra-short duration ETF — over 14 consecutive weeks of outflows. That was the longest streak on record for the product, whose ticker is SHV. Meanwhile, investors have pulled $2.4 billion from the $14 billion SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) over 10 weeks, according to Bloomberg Intelligence data.”

As mentioned, thank Covid-19 for that movement to cash.

“Investors accumulated record amounts of cash earlier this year amid concern over the impacts of the coronavirus pandemic on the global economy, with assets in money-market mutual funds soaring to a record $4.8 trillion in late May,” the report added. “Now, that cash is coming off the sidelines as stocks surge and corporate bonds look increasingly appealing. Additionally, the Federal Reserve’s commitment to keep interest rates at near-zero levels for the foreseeable future is further curbing appetite for short-duration Treasury ETFs.”

“It’s recognition that ‘ZIRP’ will be around for a long time, combined with a rising risk appetite,” said Kathy Jones, Charles Schwab Corp.’s chief fixed-income strategist, referring to the concept of a zero interest-rate policy. “Short-term Treasury ETFs are looking less attractive than alternatives. Equities are benefiting. We also see interest in foreign equities and high-yield and emerging-market bonds.”

Now, with major indexes like the S&P 500 notching consistent gains over the past five months, movement from short-duration Treasury ETFs could continue. That could be compounded by the record low yields fixed income investors are experiencing in the current environment.

“Because they’re not generating any yield, they are acting as huge dead weight in many people’s portfolios,” said Dan Suzuki at Richard Bernstein Advisors. “Investors are probably chasing higher returns, which means moving up the risk spectrum.”

SPY Chart

SPY data by YCharts

For traders, playing the ups and downs of the S&P 500 is accomplished through the SPDR S&P 500 ETF (NYSEArca: SPY). Being the biggest ETF, it also allows for high liquidity so investors are never hard pressed for volume when looking to buy or sell SPY.

SPY doesn’t merely lend itself to the fly-by-night trader who feeds off the adrenaline rush of getting in and out of securities with requisite speed. It’s also flush with investors who are in it for the long haul–the buy-and-hold investor who values SPY for its liquidity, among other things.

For more market trends, visit ETF Trends.