Index ETFs: Time to Buy the ‘Triple High’?
Fund flows support record highs in US equities
The optimism among US equity bulls is simply remarkable, reflecting both in ETF performance and fund flows. Last week, SPDR’s S&P 500 ETF Trust (SPY), PowerShares’ QQQ Trust (QQQ), and SPDR’s Dow Jones Industrial Average ETF Trust (DIA) simultaneously rose to triple record highs on Thursday. The last time this happened was on December 31, 1999.
Even more remarkable is the fact that investors largely increased US equity exposure instead of using this opportunity to unload some of their long positions. Last week’s fund flows in four of the major U.S. equity index ETFs is shown in the chart below.
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The big four US equity ETF‘s (SPY)(IWM)(DIA)(QQQ) witnessed a whopping ~$4.4 billion in net inflows last week. Notably, SPY absorbed ~75% of last week’s net inflows. Capital allocation to the broad-market ETF (SPY) may reflect investor urgency to be part of a potential leg higher in US equities as a whole, rather than selectively picking potential outperformers. After all, SPY’s portfolio offers broad and diversified exposure to the US economy, which you can see just by looking at the breadth and weight of the ETF’s top three industry groups. Pharmaceuticals weigh in at ~7.1%, closely followed by the ~6.8% weight of the Internet industry and the ~6.6% allocation to retail.
Desire for exposure to the broader US economy was also driven by last week’s positive earnings surprised out of the retail sector, which is highly reflective of consumer sentiment. One of the most notable examples was Macy’s (M). Shares of the retailer posted a weekly gain of ~16.7% as the company beat earnings estimates.
Back to 1999? Not according to fund flows
As we mentioned above, the last time the Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq simultaneously closed at record highs was on Friday, December 31, 1999. As most of us remember, US equity markets imploded shortly after that. The US equity benchmark ETF (SPY) tumbled ~10.7% in 2000, fell another ~12.9% in 2001, and topped it all with a yearly drop of ~22.8% in 2002.
This history may terrify some market participants. However, comparing fund flows throughout 1999 to 2016 reveals a significant difference.
- 1999: In 1999, cumulative fund flows into SPY mostly hovered in negative territory with a sudden upside explosion during the month of December. These flows remind us of a rather erratic and irrational desire to chase returns into year-end.
- 2016: YTD (year-to-date) cumulative fund flows into SPY’s have remained in positive territory and have been much more “measured” compared to 1999. These fund flows show a less “impulsive” nature among investors.