Reading ETF Flows Is Easy, Until It’s Not

Last week, there were some curious data points in the weekly ETF flows story we posted.

Nearly $600 million in assets flowed out of the iShares Edge MSCI Min Vol USA ETF (USMV). In and of itself, it’s not unusual for a $14 billion fund to lose 4% of its AUM in a week; however, it’s the biggest weekly outflow of 2016 for one of the most popular exchange-traded funds so far this year.

The fund has been outperforming for most of the year, but has started to fade in the last few weeks, so investors taking money off the table is reasonable and prudent.

However, on the flip side of the weekly flows coin, some $336 million flowed into the iShares Edge MSCI USA Quality Factor ETF (QUAL), a $3.2 billion fund. For a bit more symmetry, the last month has seen USMV lose $523 million in assets, while QUAL has gained $533 million.

There’s no telling how much of USMV’s outflows, if any, ended up in QUAL, but it’s reasonable to presume there could be changing sentiment when it comes to single-factor funds by looking at these flows.

USMV is down 5% from its all-time high on July 22, and remains up 8.76% for the year. QUAL is up 5.93% for the year, but is up 7% since its recent low on June 28 a few days after the “Brexit” vote.

If Reading Flows Could Be So Easy

But it doesn’t take long to look at ETF flows and come away scratching your head. While you could make a case in the above-mentioned example that there was some type of rotation going on, a look at flows involving the two biggest junk bond ETFs is a classic example of how trying to read the ETF tea leaves when it comes to flows can be folly.

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) are very similar funds that offer exposure to high-yield debt, with similar performances for the year: JNK is up 13.88%, while HYG is up 13.13%.

However, in the last month, the $17 billion HYG has taken in $1.2 billion in new assets, while the $12 billion JNK has lost $433 million. 

Here it could just be split opinions about where rates are going in the short term.

That $1.2 billion into HYG is a bet that rates aren’t going to go up anytime soon, and in fact may fall, which will increase the price of the fund. Conversely, the $433 million taken out of JNK may have a more hawkish conviction that rates will be going high sooner rather than later, which could hurt the price of the fund as yields rise. (Bond prices and yields generally move inversely to each other.)

I guess the lesson here is that sometimes ETF flows can offer some insight into investor sentiment, while other times that picture is as clear as mud.

At the time of the writing the author did not own any of the securities mentioned. You can reach Drew Voros at [email protected].