Category ETFs: Where Is the Yield?
Inflows: EEM, LQD, and XLE
Analyzing last week’s most significant ETF inflows in the context of our entire ETF universe, we note that investors continued to move capital into emerging market equities in search of yield. Once again, iShares’ MSCI Emerging Markets ETF (EEM) topped our inflows list, gaining ~0.3% and marking a new 52-week high. Readers who are curious about the drivers behind the continued inflows into EEM should take a look at our recent ETF flow series:
- Once Again, It’s EEM!
- Country ETFs: Double Down on Emerging Markets?
- Country ETFs: Hungry Emerging Market Bulls
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We already discussed the increasing inflows into XLE in Part 3 of this series. Let’s turn our attention to the US investment-grade bond space.
Inflows into investment-grade bonds accumulate
The fund flows into LQD reflect the larger story of investor urgency to find products with the highest potential for future yield. After all, government bonds around the world generate zero or even negative yields.
- In Europe, the German five-year government bond yield is trading at historical lows at about -0.5%.
- The BOE (Bank of England) cut interest rates in early August, sending UK government bond yields to historical lows as well.
- In Japan, ten-year government bond yields slipped below zero earlier this year.
Keeping these factors in mind, consider that LQD’s indicated yield of ~3.1% seems relatively attractive. Investors seem to think so. The ETF ranks fourth in terms of fund inflows within our entire ETF universe on a YTD (year-to-date) basis, and it takes second place since the BOE cut interest rates in early August.
Outflows: US equities saw significant capital outflows
Taking a look at the largest outflows within our ETF universe, we see the magnitude of last week’s outflows in SPDR’s S&P 500 ETF Trust (SPY), which discussed in depth in Part 2 of this series, becoming even more significant. As you can see in the chart below, SPY saw the largest capital outflows.
Along the same lines, iShares’ Russell 2000 ETF (IWM) witnessed the second-highest outflows as the global investment community starts to debate just how much more upside is left in US equities.