Investors Fleeing To This Treasury ETF

If you’re reading tea leaves in ETF flows, this one’s ominous.

Sometimes I look at market info and I wonder, “Do they know something I don’t know?”

The answer to the question is generally yes, but today’s data seem like a bit of a head scratcher. While we see massive outflows from the world’s largest ETF, the S&P 500 SPDR (SPY | A-98), of more than $6.5 billion, we saw big inflows into two interesting places.

The first is that we saw money flowing into alternative S&P 500 ETFs, like the cheaper Vanguard S&P 500 ETF (VOO | A-96) and the iShares Core S&P 500 ETF (IVV | A-98), which pulled in $1.2 and $1.1 billion, respectively. But overall, the U.S. Large Cap Equity segment lost more than $4.5 billion in August, along with big downticks in U.S. midcaps and most U.S. sectors.

Big Segment Losers

So where did all this money go? Because after all, August was a good month, with net flows of more than $15 billion in net flows, on the back of generally rising markets. Some of it went into narrower takes on the U.S. equity market—bets on value and growth. Some, as Matt and I have been suggesting, is flowing into the emerging market space.

Big Segment Winners

But two of the top four slots are taken up by the most boring asset classes in the universe—short-term and intermediate-term U.S. Treasurys. The biggest individual ETF winner of all is actually the iShares 7-10 Year Treasury ETF (IEF | A-58), followed closely by the iShares 1-3 Year Treasury ETF (SHY | A-97) and the iShares 3-7 Year Treasury Bond ETF (IEI | A-72).

ETF Winners

All told, these most somnolent funds pulled in around $3.5 billion in assets. There’s really no way to interpret this other than a flight to cash. Certainly, nobody’s parking money in the short end of the Treasury curve counting on interest-rate cuts and magical pops in principal value. Still, year-to-date, IEF holders have probably been sleeping a lot better than S&P 500 ETF holders:

IEF in fact is up more than 7 percent this year, an enormously healthy return for such a boring fund. Meanwhile, the S&P had a gut-wrenching trip to what ended up being a good August. Clearly, some class of investors got spooked and piled into the “safe money.”

If anything makes me nervous about the markets, it’s simply headroom. With the S&P up 120 percent over the last five years, investors get nervous. At some point, the sentiment turns and the nerves turn into trades, and the self-fulfilling prophecy of investor behavior kicks in for a correction.

I’m not in the business of calling tops, or making any kinds of calls, really. But there’s really no question that a class of ETF investors has started signaling they’ve had enough, and are moving their money to the virtual mattress.

At the time of this writing, the author had no positions in the ETFs listed. You can reach Dave Nadig at [email protected] and on Twitter @DaveNadig.