Dividends Are Duds?

In the face of rising rates, dividend ETFs are often seen as less attractive to investors, given these funds’ traditionally greater exposure to stocks with high interest rate sensitivity. As one may expect, dividend ETFs had a weak month in March and have now seen $2.5 billion of outflows in 2018. Those tracking ETFs on a high frequency basis might have noticed some serious head-fake flows. Large blocks of creation units may have indicated strong flows but were in fact driven by ETF rebalancing to help minimize any potential capital gain impacts. These flows were quickly reversed once ETF managers finished rebalancing, and that shift exposed the fact that yield-focused strategies are still on the outs with many investors.

High Yield Remains Unloved

As an asset class, high yield offers investors lower interest rate sensitivity than investment grade, but ETF investors continued to pull money from high-yield bond ETFs, and that made March the fifth month in a row of outflows for this category. Meanwhile, investment-grade credit has been a completely different story, with another strong month. While cross-asset volatility earlier in the year was spurred by a quicker-than-expected pace of rising rates, the markets this past month were driven more by technology’s weakness and geopolitical tensions. Even with rates in the headlines less, investors continued to seek safety in lower-risk bonds, especially those with lower duration and floating coupons ̶ a trend that continues to pick up steam.

Looking at You, Q2

For perspective, last year investors added nearly $115 billion to ETFs in the second quarter, with close to $78 billion going into equity ETFs and $35 billion into fixed income. As institutional investors continue to use ETFs in a more short-term, tactical trading and hedging fashion, we expect their aggregate flows will continue to match market volatility. Yet institutions are not the only ETF investors on the street, as longer-term investors have also gravitated towards the vehicle and do not yet appear fazed by the recent spike in market volatility. Let’s watch to see how both communities of ETF participants affect flows into the second quarter.

This article was republished with permission from OppenheimerFunds.