AP Photo/Dylan Lovan, File
The types of investments being bought and sold through exchange-traded funds over the past week suggests investors are slightly more optimistic about the global economy — or at least fatigued after weeks of extreme caution.
One of the key trends in the first week of September, according to a note out Monday from Jefferies, was that “bond proxy” ETFs saw outflows. As a reminder, bond proxies are relatively safe stock-market sectors that investors look to for income and stability, particularly during times of market volatility and a regime of ultralow government bonds.
Back in July, analysts at Ned Davis Research suggested that market sentiment for bonds and their proxies could soon be expected to reach “extreme optimism” and subsequently turn down sharply.
To be sure, it isn’t entirely clear that investors have reached that point yet, but there are some murmurs: on Monday, BCA Research released a note titled “Bond Yields Have Hit Bottom.”
It is also important to point out that the definition of “bond proxy” can be a bit fuzzy. The Ned Davis researchers flagged utilities and real estate, two of the most traditional categories, back in July. On Monday, the Jefferies team also took note of consumer staples, which also tend to offer dividends and perform better than consumer discretionary companies when the economy turns down.
Despite that, investors may be shying away from staples because they are one of the sectors most vulnerable to trade-war headwinds. Indeed, that category saw the biggest outflow over the past week. Real estate ETF assets ticked up 0.1%, but utilities declined 0.4%.
“We are in the camp that when the market moves higher, these groups move lower,” the Jefferies analysts said, referring to utilities and staples.
Meanwhile, enthusiasm for energy assets continues to dwindle: those ETFs lost 1.8% of their assets this past week, and have charted a 22% loss year-to-date. Even though investor appetite has cooled toward utilities and real estate recently, both sectors still benefit from being in favor throughout the course of the year. Utilities and real-estate fund flows are still up 19.9% and 5.8% in the year through September 6, respectively.
Finally, while the moves mentioned above would seem to signal investors have a more bullish outlook, they’re still hedging their bets. Gold ETFs gained 1.3% in flows last week. Low volatility funds gained 0.9%, and are up nearly 50% in the year to date.
In a note out Monday, DataTrek co-founder Nicholas Colas also took note of the interest in gold. “At a net level all of August’s commodity inflows went to (the SPDR Gold Trust /zigman2/quotes/200593176/composite GLD -1.59% ) and the iShares Gold Trust /zigman2/quotes/210005244/composite IAU -1.73% , 2 exchange traded funds which purchase and custody physical gold,” he wrote. “Last month’s fund purchases are the equivalent of 5,800 gold-delivery bars (averaging 400 troy ounces). Which investors think is a better place for their money than global equities…”