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An economic indicator: Why fund flows should concern investors

Part 2
An economic indicator: Why fund flows should concern investors (Part 2 of 7)

A quick recap: The fund flows and the ETF market in February

To put fund inflows or outflows into perspective, let us consider what happened to the market at beginning of the month of February, 2014. The popular SPDR S&P 500 (SPY) and iShares MSCI Emerging Market ETF (EEM) led all ETFs with the largest outflow of money. SPY lost $10.0 billion while EEM lost $4.1 billion, taking the total outflow to $14 billion on two funds alone. The top gainers for the month have been 1-3 Year Treasury Bond ETF, SHY, and Invesco PowerShares QQQ. The principal driver for the movement of funds was the asset outflows that began with emerging market stock ETFs into the U.S. market. Investors were worried that the entire global economy could be on the verge of major slowdown. The latest economic data is showing signs of slowing economic growth in the U.S., Europe, Japan, China, and other emerging markets.

2 Monthly OutflowEnlarge GraphThe outflow of capital from emerging markets has created volatility in currency markets. A savvy investor knows that the U.S. Treasuries are the classic safe haven investment. If one is unwilling to risk, he/she stacks money with the Treasury bonds or bond ETFs in the hope for a more assured yield. The massive outflow of money from equity-based ETFs has been a shot-in-the-arm for ETFs backed by the U.S. Treasuries. If the slowdown does develop (as suggested by the latest economic data), interest rates will end up staying at their extremely low levels longer than expected. Since the bond prices are inversely proportional to interest rate movements (that is, a fall in interest rates means an increase in bond prices), the higher fund inflow into bond ETFs may get more momentum in search of better performance. SPY, the SPDR S&P 500 ETF, which has a portfolio that consists of Apple Inc. (AAPL) and Exxon Mobil Corporation (XOM) among other big names, got penalized by investors in terms of maximum outflow for the month.

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