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May ETF Flows: Welcome Back, T.I.N.A.

In the midst of great economic pain, 95% of firms are trading above their 50-day moving average, the S&P 500 is now just 9% off its highs.

Investors favored US exposures and the healthcare sector in May

The greatest trick the market ever pulled is trying to convince investors that this recession doesn’t exist. In May, all US sectors had positive returns, with 23 out of 24 industries up as well. Globally, only 12 countries had negative returns, with 62% of all global stocks up on the month. That is just for May, starting from the market’s bottom (March 24), and 85% of stocks around the world have positive returns.1

Economically, however, millions of jobs have been lost around the globe, and some industries (leisure, hospitality, travel, office real estate) may not get back to “normal” for years – if at all. Global GDP growth is now expected to decline by 3% in 2020, with numerous developed and emerging market nations entering a technical recession.2

Even with all this anguish – economic, fundamental, mental and societal – the stock market appears to be a bit unfazed. No one is routing for double-digit losses and depressed stock prices, but there is a disagreement between the tape and the news flow.

There is a justification for it, however. T.I.N.A. is back, as There Is No Alternative to stocks right now, as a result of the generation-defining low interest rates.

The US 10-year yield is 0.65%. Accounting for inflation, the real yield is 0.31%. Real yields in Japan and the Eurozone are negative. In order to earn a real return, investors have to take risks and own risky assets, like stocks.

It might be just that simple, as cynical as it is. But it’s not a surprise, given that central banks from around the world have injected trillions of stimulus into the financial markets in hopes of it trickling down into the real economy.
Unfortunately, it’s unlikely for it to be on a dollar-for-dollar basis in the end ─ potentially stoking more divisiveness and inequality unless there are other policy changes aimed at remedying those longer-term issues.

In the near term, however, there are risks to the T.I.N.A trade. Negative earnings and downbeat economic data may catch up to it, as T.I.N.A. is walking on a knife’s edge. Macro volatility remains high, economic uncertainty is at record levels,3 and COVID-19 cases are still rising, albeit at a much slower pace. Given the risks of a T.I.N.A.-driven market, a portfolio’s core should likely have a defensive, high-quality bias.

No international travel
Similar to April, investors favored US over non-US exposures – mirroring the performance trends, as the US has been outperforming non-US markets by almost 7% since the start of April.

With the exception of global mandates, all other non-US segments had outflows. International single-country funds had the most outflows in May, driving the year-to- date outflow total to over $10 billion. And it’s not just from one country, either, as 52% of countries tracked had net outflows in May. Asian nations had the most, however.

Over the past three months, investors have fled non-US equity ETF exposures faster than ever before. Over $30 billion has been redeemed from non-US equity focused ETFs. Last month was the prior record, at $19 billion. Meanwhile, $61 billion has been deposited into US-targeted strategies, leading to a differential of nearly $91 billion – the largest differential over the time period measured.

Past performance is not a guarantee of future results. Source: Bloomberg Finance L.P., State Street Global Advisors, as of May 31, 2020.

Healthy sector flows
Over $6 billion was allocated to sector funds in May, following $14 billion in April. In April, sector flows represented 175% of all US fund flows, while in May, they are 97% – an indication of investors looking to participate in the rally by picking their spots and not indiscriminately buying broad beta.

While the inflows were broad, as only three sectors had outflows, there does appear to be a rotation underway. Utilities and Staples – two recessionary sectors – had outflows and reversed their year-to-date and three-month trend.

Four cyclical sectors – Consumer Discretionary, Industrials, Financials and Materials – had mirror-opposite trend reversals. Prior to this month, they were all in net outflows, but they garnered inflows in May. Based on this apparent rotation, investors may be hopeful that a recovery will be more imminent with states and countries beginning to reopen.

Yield hunting
The $28 billion that flowed into bond funds in May is a record. This comes just two months after posting the most outflows on record ($19 billion of outflows in March). As shown below, the $28 billion, along with the $22 billion of inflows in April, raises bond ETFs’ two-month total to over $50 billion. This figure is more than three times the median figure, as well, and one-and-a-half times greater than the number two spot ($34 billion covering January 2020 and December 2019).

Corporate credit (investment grade and high yield), as a combined unit, fueled the record haul for the broader bond ETF category. The $6.2 billion of inflows into high yield in May is just $100 million less than the record tallied in April. Meanwhile, the $9.3 billion of inflows into investment grade did surpass its own April record, and it did so by a wide margin – taking in nearly $2 billion more. These are two more segments that now have the greatest two-month flow totals ever.

The flow trends for investment-grade and high yield ETFs took off once the Fed announced its lending facilities on March 23. As of the most recent report,4 the Fed has purchased roughly $1.3 billion of ETFs, resulting in $27 billion of the year-to-date credit inflows coming from actual investors. And all of that makes sense ─ the Fed’s new lending programs have transformed once-risky bonds such as corporates, fallen angels and even junk bond ETFs into risky bonds that are now explicitly and implicitly backed by the Fed.

The chart below depicts investors running the “Don’t Fight the Fed”5 playbook in order to hunt for yield in a low-rate environment where the US 10-Year Yield is below 0.70%.

Past performance is not a guarantee of future results. Source: Bloomberg Finance L.P., State Street Global Advisors, as of May 31, 2020.

The risk is back on! Rotate!

While the broad government category was in net outflows, not all tenors were. The outflows were mainly concentrated on the short end of the curve, as intermediate-term government bond ETFs had inflows in May.

While the rush into ultra-short exposures abated in May, the segment has still taken in nearly 40% of its start-of-year assets. However, if the markets keep rallying, the outflow trends from May could continue, as the majority of the ultra-short and short term inflows came at a time when the market was in severe risk-off territory.

Inflows into ultra-short and short-term government bond ETFs at a time of market stress are not just a trend from this year, but over the past three years. There have been twice as many inflows when the S&P 500 Index is below its 200-day moving average than when the S&P 500 is above that technical trend indicator.

As shown below, as the S&P 500 got closer to the 200-day moving average, the inflows slowed and just recently turned negative. This is one relationship to watch, as it could mean a reversal of inflows into a space that has taken in close to half of its start-of-year assets in just four months.

Past performance is not a guarantee of future results. Source: Bloomberg Finance L.P., State Street Global Advisors, as of May 31, 2020.

Stay current on what State Street Global Advisors is seeing in ETF flows.