As financial markets convulsed lower over the past week, flows into and out of exchange-traded funds help shed a light on what investors are thinking.
“This has become a hide-under-the-mattresses environment,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “Investors are using the benefits of liquidity and commission-free trading that ETFs offer as a safe haven. The safest of assets, U.S. Treasuries, is garnering strong interest.”
CFRA data for the bumpy past week show that it’s not just any Treasurys investors are snatching up. Rather, they’re prioritizing shorter-term paper. The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF /zigman2/quotes/209499658/composite BIL 0.00% was the second-biggest gainer, behind only that most liquid of institutional investor tools, the S&P 500 ETF Trust /zigman2/quotes/209901640/composite SPY +0.45% . BIL picked up $4.4 billion over the week ending Monday. In fact, five of the 10 funds with the biggest inflows had short-term government bond strategies.
|ETF name, ticker||Category||Flows|
|SPDR S&P 500 ETF Trust /zigman2/quotes/209901640/composite SPY||US Equities - Broad Market & Size||9,268,802,650|
|SPDR Bloomberg Barclays 1-3 Month T-Bill /zigman2/quotes/209499658/composite BIL||Bonds - Treasury & Government||4,400,779,710|
|Vanguard S&P 500 /zigman2/quotes/201209218/composite VOO||US Equities - Broad Market & Size||3,701,374,532|
|iShares Short Treasury Bond /zigman2/quotes/204686525/composite SHV||Bonds - Treasury & Government||3,149,169,100|
|iShares 1-3 Year Treasury Bond /zigman2/quotes/204549300/composite SHY||Bonds - Treasury & Government||3,093,335,970|
|Vanguard Total Stock Market /zigman2/quotes/202677318/composite VTI||US Equities - Broad Market & Size||1,344,854,466|
|SPDR Portfolio Short Term Treasury /zigman2/quotes/207475852/composite SPTS||Bonds - Treasury & Government||1,332,686,290|
|iShares Russell 2000 /zigman2/quotes/209961116/composite IWM||US Equities - Broad Market & Size||680,986,900|
|iShares 3-7 Year Treasury Bond /zigman2/quotes/204694834/composite IEI||Bonds - Treasury & Government||670,629,100|
|United States Oil Fund LP /zigman2/quotes/203483736/composite USO||Commodities & Metals - Energy||651,371,000|
|Source: First Bridge Data, a CFRA company|
But some big bond funds were also among the biggest losers over the past week. About $3.1 billion flowed out of the iShares Core U.S. Aggregate Bond ETF /zigman2/quotes/200660887/composite AGG +0.26% , and the iShares U.S. Treasury Bond Fund lost $1.5 billion.
Investors also fled emerging markets funds. “Emerging market ETFs are highly exposed to sentiment for global economic growth, and the pandemic has negatively impacted demand,” Rosenbluth noted. “They also have high exposure to China, where the coronavirus first had an impact.”
|ETF name, ticker||Category||Flows, $|
|iShares Core U.S. Aggregate Bond /zigman2/quotes/200660887/composite AGG||Bonds - Broad Market||-3,133,898,300|
|iShares TIPS Bond /zigman2/quotes/200600110/composite TIP||Bonds - Inflation protected||-1,744,907,000|
|SPDR Gold Shares /zigman2/quotes/200593176/composite GLD||Commodities & Metals - Gold / Metals||-1,719,930,000|
|Financial Select Sector SPDR Fund /zigman2/quotes/209660484/composite XLF||US Equities - Industry Sector||-1,576,657,235|
|iShares MSCI Emerging Markets /zigman2/quotes/201454250/composite EEM||Global or ExUS Equities - Broad / Regional||-1,554,861,015|
|iShares U.S. Treasury Bond /zigman2/quotes/209658722/composite GOVT||Bonds - Treasury & Government||-1,459,156,090|
|iShares MBS /zigman2/quotes/207528740/composite MBB||Bonds - Mortgage||-1,298,951,100|
|iShares JP Morgan USD Emerging Markets Bond /zigman2/quotes/202964510/composite EMB||Bonds - Treasury & Government||-1,214,539,680|
|Vanguard Intermediate-Term Corporate Bond /zigman2/quotes/202884162/composite VCIT||Bonds - Corporate||-1,073,667,000|
|Vanguard Total Bond Market /zigman2/quotes/203732548/composite BND||Bonds - Broad Market||-1,055,876,000|
|Source: First Bridge Data, a CFRA company|
For Rosenbluth and other ETF insiders, the volatility of the past week has been a vindication. Market commentators have spent the past several years warning of the potential dangers lurking in passively-managed funds. If investors flee for the exits all at once, the doors could get blocked, the thinking has gone — and the all-day tradeability of ETFs just amplifies that concern.
In fact, last Thursday, fixed-income ETFs collectively traded $51 billion, more than four times their average daily volume, according to iShares. But the worst that happened was more innocuous. As MarketWatch has reported, investors in ETFs should be aware that the trading price of any given fund may occasionally become slightly disconnected from the trading values of the securities within.
That’s exactly what happened last Thursday to the big investment-grade corporate-bond fund iShares iBoxx $ Investment Grade Corporate Bond ETF /zigman2/quotes/206919681/composite LQD +0.65% , which closed about 5% lower than the stated value of its holdings. That means anyone who tried to sell LQD on Thursday received about 95% of what they might have expected.
As previously reported, one way to avoid an outcome like this is to trade ETFs using limit orders, which allow the investor to specify the values at which they want their trades to be executed. By Friday, though, that differential had shrunk to a fraction of the Thursday gap, Rosenbluth noted.