3 ETFs Caught In Risk-Off Trade

Investors are yanking assets from riskier fare as commodity prices and earnings disappoint.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

The largest small-cap equity ETF in the market, the iShares Russell 2000 (IWM | A-88), has bled more than $1.7 billion in the past four days alone; $2.37 billion if you go back one full week. The exodus from small-cap IWM, which already represents about 10 percent of the fund’s total assets year-to-date, is one indicator of investors’ growing aversion to risk.

Softening demand for the largest high-yield bond ETFs is another.

Falling prices for commodities from gold to oil could be fueling investor jitters about the health of the global economy. A so-far disappointing U.S. corporate earnings season may also be adding to concerns that the U.S. economy isn’t all that solid. After all, the market had to digest some unexpected misses from big-name companies like Apple and Microsoft.

However, you might not have known a risk-off sentiment was gaining momentum by looking at the VIX, as David Chojnacki, market technician for StreetOne Financial, pointed out. The VIX, also known as the market’s “fear gauge,” has been relatively muted in recent days, suggesting more indifference than fear. But VIX is apparently not telling the whole story, Chojnacki noted.

“While the VIX may suggest ‘complacency’ with a $12 or $13 handle, as it has had lately, we sense that a "risk on" mentality would be a false conclusion to make here based on other signs we are seeing in the markets,” he said.

These signs include the massive outflows from IWM, which came hand in hand with poor price performance that sent the fund through key technical levels of support and some 4 percent lower in less than a month.

Yes, IWM is still outperforming the SPDR S&P 500 (SPY | A-99) year-to-date, but small-cap stocks are often seen as riskier, more volatile and more sensitive to changes in the market than large-cap names. The wavering demand for the fund could suggest concerns about the economy.

In that same vein, high-yield bond ETFs are another target when risk-off grabs hold of investors.

Funds like the iShares iBoxx $ High Yield Corporate Bond (HYG | B-64) and the SPDR Barclays High Yield Bond (JNK | B-68), which had been hugely popular just a few weeks ago as they offered better relative-price to other segments of fixed income and together command about $25 billion in assets, are now nearing their lowest trading levels in 2015, and outflows from these funds are picking up pace.

In the past week, some $300 million and $500 million, respectively, flowed out of HYG and JNK, according to ETF.com data. The outflows have come despite the increasingly attractive yields these funds are shelling out.

Charts courtesy of StockCharts.com

Oil Prices A Factor

“The yields of HYG and JNK have climbed to 5.46 percent and 5.89 percent, respectively, but we are not exactly seeing managers race to buy these ETFs, at least not yet. And we suspect that the plunge in oil prices and its effects on the oil services and exploration equity markets is certainly not helping the cause here,” Chojnacki said.

Crude oil prices have slipped more than 5 percent in the past week.

“It is well known that many exploration companies are issuers of what is considered "junk" debt, and this unabated price pressure in oil and energy prices cannot be ignored,” he added. “The Fed has commented on how they believe that lower oil prices are a "net positive" for the economy in the past, but interestingly we have not heard such rhetoric from them yet this time around.”

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.