Category ETFs: How to Boost Your Returns
An intriguing fund flow divergence
The SPDR S&P 500 ETF Trust (SPY) clearly saw the largest weekly outflows within our entire ETF universe. The relative magnitude of SPY’s outflows can be seen in the following chart.
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As we discussed in Part 3 of this series, part of the reason for this capital flight is the ongoing rotation out of YTD (year-to-date) outperformers into ETFs with “catch-up” potential. Considering that SPY didn’t just rise to a fresh YTD high—it also marked an all-time high—it isn’t surprising that investors took out a significant amount of cash.
However, when examining the ETFs that saw the largest weekly inflows, we noted that two ETFs found in our “S&P 500 ETFs” category, saw large inflows. Specifically, the Vanguard S&P 500 Index Fund (VOO) attracted ~$760 million in capital, while the iShares Core S&P 500 ETF (IVV) saw inflows of ~$430 million.
As you can see in the following chart, both ETFs rank among the top five ETFs with the largest weekly inflows.
It’s all about ETF construction
Why did we see such a large divergence in fund flows among ETFs that provide very similar market exposure? Considering that SPY, IVV, and VOO all touched all-time highs last week, we have to move away from our “capital rotation” argument. In the current low-yield environment and with US equities at extremes, investors are trying to boost returns by reallocating capital into the most cost-efficient ETFs. In our SPY example, this is illustrated by the lower total fund expense ratios of VOO (0.05%) and IVV (0.07%) compared to SPY (0.095%). Also, both VOO and IVV are structured as open-end investment companies. They avoid the cash-drag that comes with SPY’s unit investment trust structure.
Before we turn our attention to the country ETF space, it has to be noted that the SPDR Gold Trust (GLD) saw the largest weekly inflows of ~$1 billion despite shedding ~1.1% on the week. Perhaps investors see the pull-back in GLD as a buying opportunity. After all, GLD has attracted significant amounts of capital in 2016. It’s also worth keeping an eye on the continued outflows seen in the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) considering that the high-yield bond ETF has been a favorite yield play throughout most of 2016.