In an environment of heightened uncertainty and rising trade tensions, ETF investors have been dumping riskier assets like stocks for the relative safety of bonds.
Almost $20 billion was yanked out of long-term mutual funds and ETFs that focus on large-cap stocks in June, marking the biggest monthly outflow for this segment in at least a decade, the Wall Street Journal reports. The outflows have continued through July but the pace slowed.
The risk-off sentiment corresponded with the first round of tariffs between the U.S. and China, along with President Donald Trump’s hints at levies on over $200 billion in goods. Despite the strong corporate earnings and U.S. economic growth, stock ETF investors remained wary of the ongoing uncertainty surrounding an escalating trade war spate.
For instance, PNC Financial Services Group Inc. has urged clients with heavy equity exposure to reduce positions and shift into government bonds. The sudden uptick in volatility forced investors to confront a period when “stock prices not only go up, they can go down,” Jeff Mills, co-chief investment strategist for PNC, told the Wall Street Journal. “We’re making sure investors have their house in order.”
Russell Investments also reiterated its “underweight” preference for U.S. stocks last month, telling investors to reduce their stock positions. The analysts also raised their view of U.S. government bonds to neutral from underweight.
$130B Funneled Into Muni-Bond Funds
Given the rising cries for caution and safety, more than $130 billion has been funneled into taxable- and municipal-bond funds in the first half of the year, with most of flows going into short-duration notes.
Meanwhile, investors funneled $55 billion out of equity funds, pools that invest in specific stock sectors and strategies that blend stocks and bonds together over the same period.
More investors have also been attracted by the rising yields in short-term debt, with yields on two-year U.S. Treasury notes now at 2.67, compared to the S&P 500’s dividend yield of 1.9%, the widest disparity since the 2008 financial crisis.
“Risk-adjusted returns on stocks versus Treasurys are not as compelling as they have been,” Brian Nick, chief investment strategist at Nuveen, told the WSJ.
One ETF that is benefitting is the ProShares Investment Grade—Intr Rt Hdgd (BATS: IGHG). IGHG was up 0.27% today as of 2:05 p.m. ET and is up 2.36% within the last three years.
IGHG investment seeks investment results that track the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index, which is comprised of long positions in USD-denominated investment grade corporate bonds issued by both U.S. and foreign domiciled companies and short positions in U.S. Treasury notes or bonds–the latter helping to contribute to its upward momentum today.
For more information on the ETF industry, visit our ETF performance reports category.