Did the equity ETF bubble burst in May?

Is this the beginning of the end?

Well, not exactly.

According to recent research from State Street Global Advisors, with just a handful of trading days left in June, fixed income ETFs have already attracted a record-breaking month-to-date inflow total of $22 billion – outpacing the previous record high of $17.5 billion in October of 2014 (when investors were growing increasingly nervous about the fate of the European and Chinese economies).

US listed ETFs have attracted $23.4 Billion of new net inflows during the first 6 trading days of June – which marks a significant turnaround from May when ETFs posted $13.9B of outflows during the month.

May’s debacle was led by global equities which went into a tailspin – posting their first monthly loss of 2019 with 70% of stocks now trading below their 50-day moving average.  According to Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors, the “Sell in May” theory was in play, as equity ETFs posted over $19 billion of outflows during the month.

“Investors shunned US-focused ETFs in May and the more than $15 billion of outflows ranks May as the 8th worst month for US geographically-focused ETFs dating back to 1998,” Bartolini said. “As a result of the trade-induced market drawdown, equity ETFs posted their most outflows for a given month ever, totaling over $19.9 billion and barely surpassing the previous record of $19.7 billion set in January 2014, when global equities fell 4% in the last week of the month over concerns of a hard landing in China and softening corporate profits in the US.”

However, outflows in May are not that uncommon, Bartolini added. Over the last 10 years, equities have had outflows in the month of May 45% of the time – the third-highest percentage for a given month. Perhaps that historical trend and this month’s flows suggest that the “Sell in May and Go Away” theory has been put into action quite regularly by ETF investors.

“In fact, the ‘Sell in May,’ a strategy where investors sell stocks at the start of May and buy again in the fall – October has inflows 90% of the time – has been empirically tested and found to be statistically significant,” he said. “While there may be some connection to this seasonality theory, investors typically do not follow through on the “go away” part, as equity ETFs have had inflows 80% of the time in June. If deals are worked out and trade tensions begin to soften, sentiment could be reset. If that happens, it would not be surprising to see the historical pattern of inflows continue this June.”

On the flip side, fixed-income ETFs attracted nearly $7 billion in May, posting their 46th month of inflows out of the last 47.

Booyah for bonds.

Bartolini said that with the market striking a risk-off tone, bonds were allocated to overall, with less equity-sensitive sectors such as Government and Aggregate, benefiting.

“However, not all segments had inflows, as credit-oriented and higher-volatility sectors, such as high yield, bank loans and emerging market debt, witnessed sizable outflows in May,” he said. “In fact, all three had outflows that equaled more than 5% of their start of month assets.”

For high yield, State Street noted this was a reversal of the year-to-date trend, as it had had inflows throughout 2019.

“Preferreds garnered interest as their long-duration profile led to positive performance as long-term rates fell,” Bartolini said. “With inflation subdued, inflation-protected strategies had outflows once again, further deepening their outflows over the last three and twelve months.”

Looking ahead, Bartolini noted that with the S&P 500 index hitting new highs next week and is up 7% in June, it’s fixed income ETFs that are on pace to set a new inflow record.

“With a few trading days left in June, fixed income ETFs have already attracted a record-breaking month-to-date inflow total of $22 billion, outpacing the previous record high of $17.5 billion in October of 2014,” Bartolini said.