April Flash Flows: A Spring Setback Prompts De-Risking
Bonds have now posted losses in five consecutive months, their longest losing streak since 1994. With stocks also declining in April, traditional portfolios remain under pressure, with a 60/40 allocation down double digits. With such negativity, investors sought to de-risk in April.
Hope springs eternal is a proverb as old as time, and it speaks to human nature always trying to find a fresh cause for optimism. With both stocks and bonds down double digits so far this year, leading to the 60/40 portfolio’s -11.48% return,1 investors have to dig deeper this spring to find any green shoots of optimism.
The return of unnerving episodic volatility has complicated this search for optimism. For instance, over the past three months the S&P 500 Index has moved up or down by 1% 35 times.2 This ranks in the 95th percentile dating back to 1956. The S&P 500 Index also has fallen below its 200-day moving average six times over the past three months3 – the second-most ever in a 90-day period.
In response to the negativity, ETF investors began de-risking.
Record Flows Halted
Last month ETFs had $10.5 billion of outflows, ending a record-setting 34-month streak of inflows when they took in $1.8 trillion of assets. The previous inflow record of 33 months was set in 2013. But during that record run, flows totaled just $440 billion – underscoring how the ETF market has grown in recent years.
Equity funds led April’s outflows. As shown in the chart below, April’s $20.3 billion outflow narrowly missed equities’ worst-ever $20.8 billion outflow in May 2019. US equities’ $27 billion in outflows – their worst ever – drove equities’ near record outflows.
ETF and Equity ETF Monthly Fund Flows
There are also weak trends beneath the surface. For instance, only 59% of all ETFs had inflows last month, compared to a typical historical median of 64%. It was not just equity funds driving April’s depth rate lower; just 61% of fixed income funds had inflows last month. This is well below their historical median of 76%. In fact, not one of the eight major categories where we track depth had a hit rate above its long-term median.
Weak headline flows (near record-setting and streak-busting) combined with weak depth of flows create a scenario of subpar magnitude, breadth, and trend. Taken together, this definitely points to a period of below-average sentiment and investors de-risking in an uncertain market environment.
Some Capital Put to Work, Selectively
There are areas where investors did seek to put their capital to work. High quality dividend strategies (+$7 billion), defensive sectors, commodity exposures, and short-duration credit strategies witnessed noticeable inflows in April.
Commodity flows were equally supported by precious metal exposures (gold) and broad-based commodity strategies. Each of those two commodity sub-sectors took in over $1 billion. For broad-based commodities, it was the fourth month in a row with inflows over $1 billion – a record run. Given that commodities are up 31% this year, this is not surprising.
Within sectors, the tone was similar. Commodity-related cyclicals like Energy and Materials took in a combined $1.5 billion, continuing their trend over the past few months of taking in assets amid the sharp increase in natural resource prices.
But there was more to the sector story, as there was a great deal of defensive posturing as well – augmenting the cyclical exposures put on. As shown below, defensive sectors, led by Health Care and Consumer Staples, took in $7 billion in April – leading to a net overall inflow for sector funds of $2 billion.
Duration Trimmed in Bonds Ahead of the Fed
As of month end, 96% (484) of fixed income ETFs are trading at a loss this year. Furthermore, the average return on those 484 funds is -8.1%.4 These are some significant losses from boring old bonds funds. Intuitively, one would think that there should be sizable outflows to match. But bond funds had net inflows.
At a sector level, the flows were heavily allocated toward government bonds. Yet of the $11 billion of inflows, $7.4 billion went to short and ultra-short bond exposures. Driving those flows are risk-off equity allocations and a desire to trim duration amid one of the harshest tightening cycles the Federal Reserve (Fed) has embarked on since 1994.
The $4 billion redeemed out of high yield bond ETFs last month is the fourth month in a row with outflows. During this time, the sector has lost $16 billion in assets – effectively wiping out the combined allocations made over the prior 23 months.
Rather than buying fixed rate high yield, high income seekers continued allocating to the floating-rate bank loan market, as Senior Loans took in $795 million. This marks the 19th month in a row this sector has had inflows.
Over this timeframe, loan funds have taken in $15 billion. Given that the Fed is poised to raise rates significantly over the next few months and that loans have a floating-rate coupon, interest in this space is likely to continue. Not to mention, loans are up 10 basis points this year while the Agg is down 9.5% and fixed rate high yield (given it still has duration risks) is down 8.5%.5
Fixed Income Flows
Digging for Optimism Amid the Weeds
Our current springtime bout of episodic volatility is being brought on by a confluence of converging macro risks with unpredictable outcomes: Global central bank hawkish positioning, the Russia-Ukraine war, slowing earnings growth featuring uneven earnings sentiment (not all buds are blooming), and the looming US midterm elections.
Looking ahead, given that a 20/80 portfolio (-9.5%) is down nearly the same as the 80/20 version (-12.6%),6 asset allocation strategies should include more than basic stocks and bonds if hope is to spring eternal. Alternatives, low-duration bonds, and inexpensive (i.e., value) high quality stocks may be options to consider as we head deeper into spring and the rest of 2022’s uncertain macro environment.
1 Based on the return of the MSCI ACWI Index and the Bloomberg US Aggregate Index per Bloomberg Finance L.P. as of April 30, 2022. 2 Based on the S&P 500 Index per Bloomberg Finance L.P. as of April 30, 2022. 3 Based on the S&P 500 Index per Bloomberg Finance L.P. as of April 30, 2022. 4 Based on SPDR Americas Research calculations of funds with a 2022 full-year performance figure. 5 Based on the return for the S&P/LSTA Leverage Loan Index, the ICE BofA US High Yield Index, and the Bloomberg US Aggregate Index per Bloomberg Finance L.P. as of April 30, 2022. 6 Based on the return of the MSCI ACWI Index and the Bloomberg US Aggregate Index per Bloomberg Finance L.P. as of April 30, 2022.
Growth Characterized by higher price levels relative to fundamentals, such as earnings.
Value Characterized by lower price levels relative to fundamentals, such as earnings.
ICE BofA US High Yield Index The ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.
MSCI ACWI Index A market-capitalization-weighted stock market index that measures the stock performance of the companies in developed and emerging markets.
MSCI Emerging Markets Index A market-capitalization-weighted stock market index that measures the stock performance of the companies in emerging markets.
S&P 500® Index A market-capitalization-weighted stock market index that measures the stock performance of the 500 largest publicly traded companies in the United States.
S&P/LSTA Leverage Loan Index A market value-weighted index designed to measure the performance of the U.S. leveraged loan market based upon market weightings, spreads and interest payments.
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