Beware: ETF flows are not always a good gauge of investor sentiment.
We’re as guilty as anyone when it comes to drawing conclusions from data in excess of the facts. We publish flows information here at IndexUniverse every day, and for good reason—flows information tells you who’s winning and losing in the ETF space.
But does it really tell you much about investor sentiment? And should you be using that information to form trading strategies?
The answer to both questions is probably no.
I’ve noticed a disturbing trend with some of my friends at hedge funds and prop desks. They’re looking to daily flows data in ETFs as a source of signal. That is, they’re building algorithms to try and get some sort of information out of the daily ETF flow data published by us (and others) that can tell them where the prices of ETFs will head each morning.
There are numerous reasons why this is a bad idea. Let’s take a look at one of the biggest problems with flows data:
The First Problem: Bad Data
The first is simple: ETF flows numbers are buggy as all get-out. To know how much money went into or out of an ETF, you need to know three things: how many shares there were outstanding yesterday; how many shares outstanding there are today; and a price.
The price is generally the easy part—if we’re going to look at flows for yesterday, we use yesterday’s net asset value where possible, and only if that’s unavailable will actual closing price be used. The problem comes with the share count.
ETF share counts are reference data. They’re not like market prices, which live in a world of regulatory and competitive pressures. If you’re a real-time data vendor, your real-time market prices need to be good, or you’re not going to get much business.
Similarly, if you’re an exchange, your closing prices better be pretty good, or you’re going to lose business. Even NAVs, which we frequently find errors in, have a regulatory structure—funds are required by prospectus to publish NAVs, and actual business gets done based on that number.
But share counts? Share counts are just nice-to-have information, and they’re frequently just wrong. We currently look at share count numbers from four different data vendors on a regular basis. They rarely match on any given day.