ETF Flows Can Reveal Market Sentiment

September 03, 2014

Looking For Real Market Sentiment?

So how do you look for real sentiment swings in fund-flow data?

You need to dig a level deeper.

For starters, to minimize the Good Harbor problem, I look for ETFs that are regularly getting inflows. The tenth-most-popular ETF in August, for instance, was the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-74). It captured net inflows on 12 of the 22 trading days last month. While that could be one investor dripping into the fund day by day, it's more likely a result of herd activity.


The next step is to look at competing ETFs to see if they attracted flows as well. If "the market" wants to buy HYG, it should want to buy all plain-vanilla high-yield bond ETFs. If only one high-yield bond ETF got inflows, it was more likely caused by a single investor.

The ETF most commonly compared with HYG is the SPDR Barclays High Yield Bond ETF (JNK | B-77). Using our fund flows tool again, I can see that JNK had $248 million in inflows in August, with positive flows on 10 different trading days.

Clearly, the market as a whole is embracing high yield.


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