Surge In US Equity ETF Flows Fueled By Oil

November flows suggest ETF investors are ahead of the game.

Reviewed by: Dave Nadig
Edited by: Dave Nadig

November flows suggest ETF investors are ahead of the game.

With the release of November’s ETF fund flows data, it’s clear that investors are quite happy about the prospects for U.S. stocks. November was the third-biggest month ever for ETFs, with more than $42 billion in net flows, and $32 billion of that was in U.S. equities.

There are plenty of opinions as to what’s going on, from rebalancing activity to year-end, tax-lost harvesting out of mutual funds to plain old “my mutual fund underperformed” angst. There’s a “risk on” rotation story that might be at work, or it might simply be the madness of crowds.

But really, I think it’s about oil.

That oil is now at levels not seen since for 5 years is hardly news, and indeed, it’s about as dramatic a chart as one could hope for


The causes of the current drop are also well understood: OPEC is – by intent or accident – perpetuating a price war with alternative oil-production here in the United States.

While oil can’t technically go to zero, what seems certain is that the equilibrium price of oil – the point at which OPEC starts cutting production, Frackers have to slow down the drilling, and prices start to respond to that decreased supply, is more likely in the 70s than the 100s for at least the next year or so.

Iran Missing From Conversation
What I’m not seeing discussed as much is the ongoing situation with Iran. Roubini Global Economics and Securing America’s Energy Future released a report highlighting how interesting the current discussions – now extended into March 2015 – around Iranian sanctions are.

In short: the combination of low oil prices and sanctions are crushing the Iranian economy, and low oil prices make it easy for the West to keep those sanctions going. This dramatically increases the likelihood of a deal next year.

So what’s the U.S. connection? As economist David Hale points out (with perhaps a bit of hyperbole), ending the Iranian sanctions would be like a $400 billion tax cut to the U.S. economy. The prospect of sustained $60 oil with Iran back in the fold is a very real thing.


Oil’s Impact On GDP

And so is the impact on the U.S. economy. The issue of oil’s impact on GDP is one of the richest areas of Macroeconomic research. You won’t find two economists who agree on what the real impact is in hard numbers (although the SF Fed has a good roundup), but a rule of thumb has been that for every $10-a-barrel move in the stable price of oil, the U.S. GDP is inversely hit for about 0.2 percent.

Put another way, the drop from $110 oil to $60 oil would add about 1% of real growth to the U.S. economy.

Intuitively, this should be obvious. If you’re a store, your costs to acquire inventory should go down. If you’re a manufacturer, all of your costs go down a little bit. All of this is good for individual bottom lines, company bottom lines, and the country’s bottom line, particularly if energy costs remain low for a long period of time.

Gas Consumption A Poor Gauge
The one area where investors seem to focus, but get confused, is consumers buying gasoline. Holiday shopping hasn’t magically taken off because gas is currently cheap, and yet, Goldman Sachs estimates the drop in gas over the last 6 months is saving consumers $75 billion a year.

The problem is that due to the changing nature of the U.S. culture and the U.S. economy, consumers have been steadily spending less and less on gasoline for their cars for years, to the point where there is now nearly no connection between the price of gas and consumer spending of any kind:


Big drops and spikes in the price of gas (in red) seem to just not move the needle when compared to the broader economic trends.

My take here is that focusing on holiday-shopping as the bellwether stat for the 2015 stock market is misguided. Sustained cheap energy is enormously beneficial to the U.S. economy, and I think that’s why we’re seeing ETF investors piling in to broad U.S. equity indexes.


Prior to becoming chief investment officer and director of research at ETF Trends, Dave Nadig was managing director of Previously, he was director of ETFs at FactSet Research Systems. Before that, as managing director at BGI, Nadig helped design some of the first ETFs. As co-founder of Cerulli Associates, he conducted some of the earliest research on fee-only financial advisors and the rise of indexing.