Balchunas On Free ETFs & UFO Sighting

May 23, 2018

Eric BalchunasEric Balchunas knows ETFs like no one else. He’s a senior ETF analyst for Bloomberg Intelligence and author of “The Institutional ETF Toolbox.” He has also recently helped launch Bloomberg ETF-IQ, the first and only television show that focuses solely on the ETF industry, and is generally one of the best sources for anything to do with exchange-traded funds. recently spoke with Balchunas to get his take on the developments in the world of ETFs so far in 2018. He will also be a featured speaker at the Inside Smart Beta Conference, June 6-7, in New York. U.S-listed ETFs recently crossed $100 billion in inflows for the year, which is 45% less than last year at this time. Why do you think we're seeing such a dramatic slowdown in 2018?

Balchunas: It’s the stock market. The S&P 500 is up 3% this year, compared to 8% last year at this time—and it’s been much more volatile. But I’d argue that $107 billion this year is more impressive than $180 billion was last year, which was a utopian environment, where everything just went up all the time.
Relatively speaking, I look at 2018 as a pretty good year. I expect to see the flows continue to come in, minus a punch in the face here and there. Fixed-income ETFs are pulling in a lot of new money this year, even though interest rates are rising rapidly. Does that surprise you?

Balchunas: It did at first; I remember the taper tantrum and how every little rate rise scared people out of fixed income. But I also think that fixed income flows are an optical illusion. Yes, relatively speaking, fixed-income ETFs are taking in more than equities. But year-to-date, they've taken in less than they did last year at this time.

It’s not like everybody is rushing to fixed income; it’s more “business as usual” for fixed income. U.S. stock market volatility suppressed U.S. equity inflows, and that’s what makes fixed-income inflows seem that much greater this year.

That said, where you do see the money going is ultra-short-term debt, which is a money-market-fund type of play. That's just people who were a little nervous after February and are just looking to park cash somewhere.

Then there's the iShares Floating Rate Bond ETF (FLOT), which is doing very well. That’s clearly rate related.

As for junk bond ETFs, all year long you’ve seen them riff off of the 10-year Treasury yield. You see outflows if 10-year yield goes up, inflows if 10-year yield goes down. Last year, we saw a handful of thematic ETFs that really caught the attention of the investing world after they surged and picked up hundreds of millions of dollars in assets. The ROBO Global Robotics and Automation Index ETF (ROBO) and the Global X Robotics & Artificial Intelligence ETF (BOTZ) come to mind. Are you seeing any home-run ETFs like that this year?

Balchunas: BOTZ is still doing amazing. I've never seen an ETF go from oblivion to the top 1% that fast. It's unbelievable. It's a total rare event.

Another one that had a great last year and continues to clean up is the iShares Edge MSCI U.S.A. Momentum Factor ETF (MTUM). The resilience of tech stocks has kept this thing outperforming the S&P 500. It's also dirt cheap, at 15 basis points. Over the past year, it's taken in $4.6 billion. In other words, it's seen 100% organic growth.
This is a real juggernaut; it’s putting momentum on the map. Momentum—unlike value, growth and even low vol—is kind of new to that whole factor ETF world. It’s the new kid on the block, and now it's the fastest growing on an organic-growth basis of all the smart-beta categories.

A couple of other ones we’ve covered that are seeing growth, but from a much lower base, are the Loncar Cancer Immunotherapy ETF (CNCR) and the ProShares Long Online/Short Stores ETF (CLIX).

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