Authored by Nicholas Colas via DataTrekResearch.com,
The most hated US equity bull market of all time has lost none of its ability to both repulse fresh capital and still live to fight another day. Readers with a few years on their career odometers will recall market pundits embracing the “most hated” epithet sometime in 2011-2012. It has stuck ever since. The reason for that name: even as US markets rallied, investors (mostly retail, in the form of mutual fund holders) just kept selling down their positions.
Data from the Investment Company Institute tells the more recent chapters of this story:
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In 2016, when the S&P 500 delivered an 11.8% total return, mutual fund/ETF investors sold $67.6 billion of US stock funds.
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In 2017, the S&P 500 tacked on another 21.6% return. Investors lightened up even more, redeeming a further $50.3 billion in domestic equity mutual funds/ETFs.
So now that US stocks have begun to waver in 2018, are mutual fund/ETF investors beginning to wade back in? No, they are not:
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Year to date outflows from US equity mutual funds and ETFs already exceeds all of 2017, with $56.6 billion of redemptions.
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January was a brief bright spot, with $10.8 billion of inflows to US equity products.
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February’s volatility killed the momentum, however, with redemptions of $41.3 billion.
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Data for April (through the 18th) shows $4.6 billion of outflows from US equity funds.
Now, even with these outflows US stocks are still +30% higher than where they began 2016. Other buyers – most notably public companies themselves – have replaced traditional sources of demand. That has worked well enough for now.
As much as mutual fund/ETF money flows may not explain shifts in long-term asset prices, the flows into exchange traded funds are a valuable source of market intelligence. Unlike mutual funds, these vehicles actually draw incremental capital so they give a glimpse as to where “Fresh money” is going. And since the data here is both very granular and timely, it also yields some very specific observations.
Looking through the April 2018 (through last Friday) ETF money flow data (courtesy of www.xtf.com), here’s what we see:
#1. April was a below-average month for ETF money flows. With one day left, inflows total $26.1 billion. The one-year average is $31.7 billion/month, or 21% higher than April 2018.
#2. If there is a bear market in bonds, no one has told ETF buyers:
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Equity inflows through last Friday total $8.5 billion.
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Fixed income inflows through the same date are $15.3 billion, or almost twice that of equity products.
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Commodity funds represent the balance of April’s net inflows, with $2.1 billion of purchases.
#3: Equity flows are well distributed in terms of geography:
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April US equity inflows total $4.9 billion, or 58% of the total.
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Inflows to Emerging Market Equities total $2.4 billion, or 28% of the total.
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Non-US developed economy equities have received the balance: $1.2 billion, or 14%.
#4. In terms of US equity flows, ETF investors are buying products that span different market caps:
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Large cap funds have actually seen $141 million of redemptions for April-to-date.
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Instead, the large flows were to either small caps ($1.7 billion of inflows) or cross-market cap ETFs ($3.1 billion)
#5: Fixed income flows are more domestic than equity inflows, and strangely less concerned about shortening duration than one would think given the move higher for rates in April.
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US fixed income ETFs have received $11.0 billion of inflows, or 72% of total bond fund flows.
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Roughly a third (34.5%) of this capital went to short duration products.
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Only $1.6 billion (14.5%) was invested in long duration funds…
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…But most of the balance ($4.1 billion, or 37%) went to funds with no specific duration requirement (think AGG or JNK), but that tend to hold longer maturity paper.
#6. Despite the move higher for crude oil in April, almost all the inflows for commodity ETFs went to gold.
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Total inflows to gold-linked ETFs for April-to-date are $1.8 billion, or 90% of all commodity flows.
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ETFs tied to crude oil have only seen $90 million of inflows this month.
One last point: US stocks have managed to do very well for close to a decade despite large and routine redemptions from popular products like mutual/exchange traded funds.
Buybacks filled the void, as we have noted. What happens when corporate profits soften and companies slow their repurchases? We hope millennials are in a position to replace their parent’s equity holdings with their own investments when that day arrives.
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