An economic indicator: Why fund flows should concern investors

Part 3
An economic indicator: Why fund flows should concern investors (Part 3 of 7)

Market scenario: Equity ETFs outperform high yield bond ETFs

An investor looks at the weekly fund flows data as a prime indicator that signals changes in the market sentiment. During the most recent period of February 20 to February 26, 2014, SPY, the ETF tracking the S&P 500 Index was the best performer in terms of gathering new assets. Just two weeks ago, investors in the high yield bond market were very skeptical about the high yield bond resistance in the midst of a rising interest rate environment. Generally, interest rates are inversely proportional to bond prices; when rates decrease, the price of the bond goes up and vice versa; but last week, despite the marginal increase in the U.S. ten-year Treasury yields from 2.73% on February 21 to 2.75% on February 24, high yield bond prices increased. The U.S. Total Corporate Bond ETF (AGG) increased by 0.43% last week.

6 Most recentEnlarge GraphOn February 26, 2014, SPY gathered $1.73 billion in new assets, while the iShares Russell 2000 ETF (IWM) redeemed $291.5 million, as markets fell on downbeat housing and consumer confidence data. SPY has some of the best known stocks including Apple Inc. (AAPL) and Exxon Mobil Corporation (XOM). On February 24, 2014, ETFs witnessed net inflows in excess of $4.4 billion, which raised the total U.S.-listed ETF assets to $1.715 trillion from $1.712 trillion. There was no correlation between net inflows and asset under management of the ETFs during past one week. On both February 24 and February 26, SPY had positive inflows of $1.09 billion and $1.72 billion, respectively, but saw very little movement in asset under management (or AUM). AUM is the market value of assets that an investment company or the ETF manages on behalf of investors.

For main high yield corporate bond ETFs like JNK and HYG, volumes went up during February 21 to February 26, 2014. In JNK, the SPDR Barclays High Yield Bond, volume was 2.17 million on February 21 and went up to 5.65 million on February 25 before falling to 3.1 million on February 26. Similarly, iShares iBoxx $ High Yield Corporate Bond ETF (HYG) managed to increase volume from 2.57 million on February 21 to 3.53 million on February 24 after which it came down to 2.72 million on February 26. Going forward, the policy decision of the Fed on account of movement of interest rate will largely decide the volume and demand for bond ETFs.

Overall, investors poured $7 billion into stock funds during the week, which is continuing to show a steady appetite for risk on a rebound in stock market performance. However, funds that hold emerging market stocks have posted net outflows, reversing inflows of $361 million over the third week of February 2014.

The Realist Discussions