Q3 ETF Flows: Cautious Optimism

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Q3 ETF Flows: Cautious Optimism

Exchange traded funds continue to gather assets in the US, but here’s something interesting: the number of ETFs is down in 2020. Since the start of the year, sponsors have launched 166 funds but closed 175 ETFs. Money flows themselves are still fine, with $255 billion of fresh capital coming in. In terms of the total number of these offerings, however, we may have well hit “peak ETF”.

Aside from their investment merits of transparency and cost, ETFs are also useful for understanding capital market trends. Two sets of examples:

#1: What’s the best single investment idea of 2020 and for just Q3-to-date? With 2,341 US listed ETFs dedicated to seemingly every slice of the investment landscape, it’s easy enough to find out: There are 27 unlevered and passively managed ETFs up at least 40% this year, and they mostly fall into 3 buckets.

  • Long volatility: VIX-related ETFs with exposure to either mid-term futures contracts (i.e. VIXM, VXZ) or just near term (VXX, VXY) are up 68% – 83% this year.
  • Long Online Shopping/Clean Energy/Online Gaming/Tech: just over half (14) of all +40% YTD ETFs fall into this category. Top performers include ONLN (+77%), TAN (+67%) and HERO (+57%).
  • Long Silver: the SLV ETF is up 47%, and there are several funds with similar structures and therefore similar gains.

As for the 10 ETFs with greater than 40% losses YTD, no prizes for guessing what they (almost) all have in common: crude oil exposure. The ill-fated USO is down 70%, for example, the worst performing unlevered passive ETF listed in the US. The only non-Energy ETF in the down +40% camp is TAPR, a product that shorts Treasuries, down 66% YTD.

And here are the Q3-to-date winners and losers:

  • There are 26 unlevered/passive ETFs up more than 20% since the start of July. The largest chunk are silver-related, followed by several clean energy funds, and also a few more traditional cyclical plays like home construction and retail.
  • There are only 4 ETFs down more than 10% QTD: 2 VIX products (VXX, VIXY), an Energy MLP fund (MLPO) and the MSCI Turkey (TUR) product.

Takeaway: we’re a bit surprised there’s not been a single unlevered passive ETF that has doubled YTD – by this time of the year there are usually a few with that claim to fame. That tells you how hard it’s been to make high-beta “real money” in 2020 and (perhaps) why so many retail investors have migrated to single stock trading.

#2: ETFs are also useful for monitoring where fresh capital is going, better in fact than mutual funds, where equity outflows are almost constant. Here are Q3-to-date ETF money flows:

  • Total: +59.9 billion
  • Fixed Income: $33.9 billion (57%)
  • Equity: $15.4 billion (26% of total)
  • Commodity (mostly gold and silver): $9.9 billion (17%)
  • Worth noting: bond ETF money flows are exceeding equity products YTD as well, $129 billion to $82 billion.

And here is the Q3 2020 ETF money flow data for a variety of equity fund types:

  • US equities: +$10.4 billion
  • Non-US: +$5.0 billion

Comment: Financials, Industrials and Consumer Discretionary are the big money flow winners QTD for US stock ETFs ($2.3 billion of inflows). Chinese equities are the standout offshore (+$1.4 billion).

  • Environmental, Social and Governance: $2 billion, or 13% of total equity flows

Comment: ESG flows are back to being robust after a sluggish period at the end of Q2.

  • Value style: +$484 million
  • Growth style: -$3.1 billion

Comment: even though growth continues to work, ETF investors are anticipating a rotation to value.

  • Low volatility: -$1.1 billion
  • Dividend yield: -$878 million
  • Momentum: +$383 million

Comment: low volatility/dividend funds tend to draw assets when investors want “safe” equity exposure. At present they seem to prefer juicier approaches, such as momentum.

Takeaway: as much as recent (QTD) money flows are fairly conservative, favoring bonds over stocks, what capital that is flowing to equities is clearly betting on a continued cyclical recovery both in the US and around the world.