Stocks, Bonds Drive ETF Inflows


With just a handful of months to go this year, flows into exchange-traded funds (ETFs) show few signs of slowing.

Investors, wary of lofty equity valuations and the dangers of fixed-income securities in a rising interest rate environment, have few places to park cash other than ETFs. This influx of cash continues amid a  CBOE VIX Index that has been mired at decade lows – just this year alone it has spent more days below 10 than in all of its 26 previous years combined.

Matthew Bartolini, SSGA

“It’s clear that investors continue to hum along and remain unfazed by geopolitical tensions and Washington rhetoric; evidenced by the $40.4 billion deposited into equity funds in October,” said Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors. “This is nearly twice the amount we witnessed in September, and the largest monthly flow since September 2016 when the “Trump Bump” was in full effect.”

In breaking down the stock inflows, he added that nearly $26 billion were deposited to US funds, while non-US focused funds took in over $11 billion. On the sector level, Materials and Industrials led the pack, attracting $2 billion and $1.9 billion, respectively, while Technology and Financials each took in $1.3 billion.

“The uptick in October equity flows was led by US exposures and not international, the segment which has been the darling throughout the year,” Bartoini continued. “This is not a surprise, as US equity markets were gripped by the revitalization of the reflationary “Trump Trade” on the heels of tax reform talk, with the S&P 500 Index rallying 2 percent in October, notching its 50th new all-time high in 2017.

However, international funds an ETFs also have a story to tell. SSGA reported that non-US focused funds took in over $11 billion in October, led by developed exposures. The yearly absolute figures are record setting, Bartolini noted, explaining these figures as a percent of start of year assets depict how seismic the shift towards overseas has been. For instance, developed ex-US funds have accumulated 36 percent of start of year assets compared to just 9 percent of US focused funds. Emerging market funds have also gotten in on the action, taking in over 30 percent of start of year assets.

“These shifts highlight how investors are traveling overseas in search of opportunities supported by improving growth and attractive valuations,” Bartolini said.

And the inflows aren’t just into stock funds either, he added. In his latest US ETF Flash Flows report, Bartolini reported bond ETFs continued their tear, attracting nearly $10 billion in October, taking the annual haul to nearly $114 billion. This is the first time in history that ETF bond flows have breached the $100 million level.

“Based on the average monthly flow in 2017, fixed income flows could end up over $130 billion for the year – a startling figure,” Bartolini said. “But, if equity funds look like the big winners in absolute dollars, bonds are the funds to watch, amassing nearly 25 percent of start of year assets compared to equity funds’ 13 percent. This clear shift into fixed income ETFs can be partly explained by demographics, the need for income and the potential efficiency the product structure may provide relative to other investment vehicles. “

Only two bond segments SSGA tracks witnessed outflows in October, and on a year to date or trailing 12 month basis, not a single segment is in outflows. Bartolini said this is evidence of just how widespread the search for income has been in 2017.

“The leaders for October were the more traditional aggregate and investment grade corporate spaces, offering a relative yield pick up over treasuries and introducing some credit risk into the portfolio,” he said. “But with rates still low on a historical basis, to clip a higher coupon in the search for yield, investors sought out more credit sensitive segments of the bond market in October, and throughout 2017.”


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