Heavy ETF Trading & Inflows Post Election

Since Donald Trump unexpectedly won the U.S. presidential election Tuesday night, a lot of market commentary has been circulating about what happens next.

In the ETF market, the immediate aftermath of a highly contested race included high trading volume, early signs of sector rotation, according to some, and a shake-up among safe-haven assets.

In all, ETFs attracted more than $6.1 billion in fresh net assets on Wednesday, Nov. 9, alone. The bulk of the creations—nearly $5 billion—landed in U.S. equity funds. Broad, vanilla-type ETFs such as the SPDR S&P 500 (SPY) and the iShares Core S&P 500 (IVV) saw sizable inflows.

Biotech ETF Gets Big Asset & Price Boost

Also noteworthy was trading volume. According to iShares, some $174 billion in ETFs traded on Wednesday, representing as much as 45% of all equity trading volume early in the day. Some of the day’s big-volume surprises included trading activity in the iShares Nasdaq Biotechnology ETF (IBB), according to iShares, which saw some $3.2 billion in volume—a record. IBB has more than $7 billion in assets.

Biotechnology is one of the subsectors many are looking to benefit from the Trump win as he possibly pushes for less regulation and a loser grip on an industry vilified earlier this year for its pricing practices. Since Election Day, IBB has rallied more than 10%.

Chart courtesy of StockCharts.com

Sector Rotation

Other takeaways from recent ETF activity, according to State Street Global Advisors’ Dave Mazza, is that investors may steer toward certain sectors that could benefit going forward.

“While markets may be in a state of unease, Trump’s policy stances have the potential to create some sector and industry opportunities,” Mazza said in a commentary, singling out defense and infrastructure—thanks to more spending; health care and biotech, as Trump works to repeal Obamacare and is less vocal on drug pricing; and energy, thanks to his support of the coal industry and his vow to finish the Keystone XL pipeline, he said.

Already on Wednesday, it was evident that as the S&P 500 rallied, not all sectors were contributing to the gains, as Nick Colas of Convergex pointed out. Four of the 11 S&P 500 sectors were actually in the red, among them consumer staples, technology, utilities and real estate.

“Domestic equities can rally another 2-4% in the very near term,” Colas said in his daily commentary today. “More important than outright direction is sector and thematic rotation.”

Safe Haven

Where investors stand in terms of safe-haven assets is a little more puzzling. Gold was a big hit following the surprising election outcome. The SPDR Gold Trust (GLD) was among the day’s top 10 creations, remaining one of the year’s most popular fund overall.

But in the fixed-income market, investors trimmed exposure to the perceived safety of long-dated Treasurys, selling positions in funds like the iShares 20+ Year Treasury Bond ETF (TLT) and even the Vanguard Total Bond Market Index Fund (BND) as yields rose.

“Over the last few years, there has been an unusual mismatch between stock yields and Treasury coupon rates. Simply put, stocks have yielded more than bonds, because central banks have been suppressing long-term rates to spark growth and inflation,” Colas said.

“It should be the other way around, because stocks have the possibility of capital appreciation over time,” he added. “Now that phenomenon is unwinding as central banks ease up on their bond buying and new factors like Trump’s fiscal stimulus plans capture the market’s attention.”

If there’s one thing every market pundit seems to agree on, however, it’s that the Trump win will translate into higher market volatility. Wednesday’s intense trading activity would suggest they are right.