International equities and domestic fixed income are the flavors du jour for investors.
The S&P 500 Index reached new highs in May, but you wouldn’t know it by just looking at month-to-date ETF asset flows. That’s because month-to-date, ETFs have gathered $6.2 billion in new assets, with the lion’s share of assets flowing into international equity ETFs.
Specifically, $3.6 billion has flowed into international equity after the first full two weeks of trading in May (May 1 was a Thursday), according to data compiled by ETF.com Analytics. After international equities, U.S. fixed-income ETFs pulled in $1.6 billion in new assets month-to-date.
Also, U.S. equity ETFs attracted $700 million in new assets and international fixed income ETFs pulled in some $40 million in assets.
According to data compiled by ETF.com Analytics, the top three individual funds in terms of asset-gathering so far this month are as follows:
- $5.1 billion has flowed into the iShares 7-10 Year Treasury Bond ETF (IEF | A-51)
- $804 million into the iShares MSCI Emerging Markets ETF (EEM | B-99)
- $754.1 million into the Vanguard FTSE Europe ETF (VGK | B-97)
After surging to more than 30 percent last year, the S&P is up about 1 percent year-to-date thanks to mixed U.S. economic data and a dovish outlook from the Federal Reserve. Investors seem again to be reaching for yield in all corners of the ETF market, including both in fixed income and in dividend-focused corners of international equity markets.
“It looks like equities are getting the lion’s share of flows but fixed income is also seeing inflows, which makes sense because of the rally in the asset class,” Nicholas Colas, chief market strategist at ConvergEx Group, said on the sidelines of a conference in New York focused on managing currency risk in the ETF market. “People chase what works, and that’s fine.”
Colas also noted that the yields on 10-year Treasurys began the year at 3.0 percent and are now at 2.5 percent, making investors reach for yield in other areas of the fixed-income market, such as high-yield securities. When bond prices rise, their yields fall.
“We had disappointing first-quarter GDP numbers, and there’s not a lot of proof that there’s inflationary pressure in the system. Clearly, investors are reaching for yield,” he said.
ETF Asset-Gathering Record In Sight
Although the first quarter was choppy in nature, Colas said he’ll be surprised if the ETF industry can’t attract $200 billion in total flows this year, with 75 to 80 percent of the assets flowing into equities and the balance going into fixed income.
“The outlook for growth has changed and people are talking about outright deflation in Europe, and if there’s deflation in Europe, it’s hard to see a lot of inflation in the U.S.,” he said.