Good-Bye to SPY? Not So Fast!



Volatility causes unprecedented asset moves after Brexit vote

A thunderstorm reverberated throughout the global markets on June 24, 2016—the so-called Brexit Friday—and the following Monday. Investors are realizing the necessity of adjusting outdated risk-management models.

Violent post-Brexit-vote volatility caused unprecedented standard-deviation moves across asset classes. The 18+ standard deviation decline in the British pound (GBP/USD) and the ten-sigma sell-off in European Banks (SX7E) illustrate just how powerful Black-Swan events such as the Brexit vote really are.

The same logic can be applied to fund flows. Consider Monday’s flows in US equity index ETFs. Investors pulled out ~$6 billion from the SPDR S&P 500 ETF (SPY) in only one day, which made up the majority of ETFs’ weekly flows.


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‘Sigma-tized’ investors recover surprisingly fast

Faced with a new investment landscape, investors shifted money from riskier assets such as equities to safe havens, including U.S. Treasuries and gold (GLD). Risk-aversion continued on Monday, as cautious investors hedged existing long positions in risk assets.

However, Market sentiment turned around on Tuesday, June 28, in the spirit of the good old “buy-the-dip” mentality. And most US equity indexes finished the first week in the second half of 2016 in positive territory.

Examining post-Brexit-vote flows in US index ETFs: Good-bye to SPY? Not so fast!

All four major US equity index ETFs—SPY, DIA, QQQ, and IWM—posted significant gains last week. It was an outcome that seemed almost impossible after Monday’s Market turmoil. In contrast, aggregate US equity index ETF flows show that investors pulled out ~$6.6 billion during the week. The outflows sparked intense discussions about the sustainability of last week’s turnaround.

Additionally, voices that suggested the beginning of a bear market in US equities became louder. But a deeper analysis revealed that the outflows were not as worrisome as they seemed on the surface. Let’s take a look at some key takeaways from the week:

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  1. Let’s break down last week’s $6.6 billion aggregate outflows into four of the major US equity index ETFs—SPY, DIA, QQQ, and IWM. Outflows were far from evenly distributed. In fact, investors pulled ~$5.4 billion out of the SPDR S&P 500 ETF (SPY), representing ~82% of the total. The technology-focused PowerShares QQQ ETF (QQQ) was the only other ETF that witnessed outflows. The SPDR Dow Jones Industrial Average ETF (DIA) and the iShares Russell 2000 (IWM) actually attracted inflows.
  2. Examining last week’s outflows day-by-day, we see that investors didn’t pull out cash continuously throughout the week. Instead, most of the weekly aggregate outflows occurred on Monday. This was the second day of the brutal post-Brexit-vote sell-off, so outflows in risk assets, including US equities, shouldn’t have been much of a surprise.

We’ll let the above chart speak for itself.

Finally, keep in mind that last week marked the end of 2Q16 and the first half of 2016. That’s when institutional investors often engage in “window-dressing” (selling certain holdings and buying others) before presenting performance reports to investors.

Along the same lines, money returned to equities on July 1, 2016, the first trading day of the third quarter and the first day of the second half of 2016. Evidently, this was seen the most in SPY, as the ETF witnessed ~$2 billion in inflows.

Next, let’s look at GICS (Global Industry Classification Standard) sectors and the rate-sensitive ETFs.


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