Chase ETF Winners & Flows At Your Own Peril

June 30, 2014



There’s no question who the winner was—the PowerShares Dynamic Media ETF (PBS | B-47), up nearly 60 percent in 2013. And this year? The absolute worst of the bunch, down more than 7 percent. You can call it cyclicality, mean reversion or unknowable voodoo, but the reality is the same—time and time again, investors get burned chasing yesterday’s stories.

ETF investors can get hoodwinked by another scorekeeping nightmare—chasing fund flows. We publish ETF fund flows all over the place at, because, as I said, everyone loves keeping score.

But one of the most common questions I get is whether ETF investors should look to flows as a “signal” that interest is strong and ongoing and will drive things higher. People look at flows as some sort of magical spirit animal that reads the market, and not the quirky sideshow of ETF structure that it is.

Consider this completely upside-down story from Bloomberg on flows into the Vanguard FTSE Emerging Markets ETF (VWO | C-90) that ran Friday: “Emerging Markets Show Biggest Premium Since ’12 With ETFs.” (Sorry to pick on Bloomberg; in general, their ETF-focused folks do an outstanding job.)

In the article, the author says: “ … asset managers have piled almost $11 billion into developing-nation exchange-traded funds listed in the U.S. this quarter, the most since 2012, according to data compiled by Bloomberg. That’s sent the premium of the biggest—Vanguard Group Inc.’s FTSE Emerging Markets ETF [VWO | A-91]—to an average 0.2 percentage-point over its underlying assets, the widest gap in two years.”

My first reaction was “20 basis points? Who cares? It’s an international ETF! You’re buying Malaysia, expect a slight bit of trading cost.” But then I went and pulled up the premium-and-discount chart for VWO on our analytics pages and found this:



Indeed, VWO’s 20 basis points premium was a recent high … it hadn’t traded higher than 20 bps since Tuesday. Which is a far cry from “since 2012.”

OK, it’s easy to pick on people for making an error; I make mistakes all the time. And in the scorekeeping flows stories, I get that it’s all about trying to make a sticky headline and a story that gets people’s interest.

But, increasingly, ETF stories are being used as a kind of carrot to drag investor interest along. And more often then not, I see the stories going just like this one—where there’s this assumption that flows into the ETF are the tail wagging the dog, single-handedly driving up whatever asset class is the ETF flavor of the month. Fully half the time, they don’t even get the data right.

There are plenty of reasons to be excited about emerging markets, or almost any other asset class. But please, don’t base your investment decisions on league tables, scorecards and money flows. Base them on where you actually want exposure to achieve your investment objectives. A radical idea, I know.

At the time this article was written, the author held no positions in the securities mentioned. Contact Dave Nadig at [email protected].


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