When entering the site and if cookies are prevented from being saved, a message must be displayed
in a popup message box informing the user that their local browser settings are preventing
cookies from being saved and that cookies are required for the site to work. Exact text
to be provided for UAT. On OK click of the message, the user should be redirected to
the global landing page (currently ssga.com).
Fixed income ETFs posted strong inflows of $16 billion, but the segment’s streak of $20+ billion in monthly flows ended
Gold funds’ streak of more than $1 billion of monthly inflows continued in August. With an inflow of more than $2 billion last month, the record now stands at eight consecutive months.
In sector-focused equity ETFs, cyclical “recovery” sectors outpaced defensive “recession” segments and thematic funds notched another monthly record with $4 billion of inflows
In the third act of Shakespeare’s seminal play, King Henry V utters, “Once more unto the breach, dear friends, once more.” The words are intended to motivate the king’s troops amid continuous assaults on the gaps of the city walls during the siege of Harfleur. The motivation was necessary, as the weary English forces were beaten back and unsure about their prospects for victory. To forge ahead, courage and steely resolve were essential.
With the standard 60/40 portfolio sitting on current year-to-date gains against a backdrop of an elevated risk regime,1 investors may need to find a similar steely resolve today. As summer turns to fall, global capital markets face five key risks:
The pandemic – COVID-19 cases continue to rise around the world, albeit more slowly, creating confusion and delaying any return to normalcy. In many parts of the world, the weather is starting to turn colder, and the pandemic will converge with flu season. However, not all pandemic risks are to the downside: There have been encouraging advances with regard to a potential vaccine and more robust testing.
The re-opening of schools – Whether online-only, hybrid, or in-person, back-to-school season amid the pandemic will be inherently disruptive, confusing, and lead to an array of potential risks. Pitfalls in this new abnormal range from increased case rates as people congregate more regularly to heightened stress and potential lack of productivity for parents juggling work while ensuring their children are able to learn.
Earnings season without the low bar – Sizeable second-quarter earnings surprises fueled gains over the last few months. In the S&P 500® Index, 84% of firms surprised to the upside by a magnitude of 23%,2 both record figures. The eye-popping results were made possible by a low bar: Second-quarter estimates were slashed 37%,3 also a record. Third-quarter earnings season is unlikely to have the same low bar, as estimates have actually improved by 3 percentage points since June.4 While still projecting a decline, without a vastly lowered bar and more data on post-pandemic operations, the price reaction from earnings season may not be the same. This environment isn’t confined to the US: Global earnings estimates haven’t been slashed to the same degree seen for the second quarter.5
Elevated valuations – US stocks have not been this richly valued since the dot-com era, and by some metrics (e.g., next twelve-month price-to-earnings ratio), stocks are trading at higher valuations than during the dot-com era.6 Overseas, valuations are more constructive; however, considering that US equities make up more than 50% of global benchmarks,7 the nosebleed multiples do not portend a great margin of safety if investors no longer wish to pay more than $26 for next year’s earnings.
The election – For the rest of 2020, the US election is the proverbial elephant (and donkey) in the room. Over the next few weeks, rhetoric will intensify as heightened social unrest can no longer be separated from any election discussion. During September, the election will likely produce more noise than actionable news. Following the debates, more tangible information about candidate platforms and polling behavior will become available. Typically, autumn seasons with elections are more volatile than non-election autumns, a trend likely to continue given the unorthodox nature of this election cycle.
Asset class ETF flows: Bond funds still gaining, though record streak ends For bond ETFs, the four-month streak of $20+ billion monthly inflows ended in August. As shown below, the asset class only took in $16 billion last month. Sizeable outflows from government funds dragged the segment lower, partially offsetting the strength in all other areas. Notably, the $16 billion figure is still above the five-year median for monthly flows of $10.5 billion.
Equity ETF flows remained somewhat constrained in August, even as the broader market rallied back to new all-time highs . The $17.3 billion inflow in August is below the five-year median figure of $20 billion. Flows into commodity funds continued to shine, led by precious metal exposures, including gold. In fact, while bond ETFs saw an end to their record streak, gold funds’ streak of more than $1 billion of monthly inflows continued in August. With an inflow of more than $2 billion last month, the record now stands at eight consecutive months.
There isn’t much to read into the sub-median equity flows for August, as the historical relationship between flows and returns is loose at best. However, the below-median flows combined with near-median trading volumes for equity ETFs and stocks in the S&P 500 in August do suggest a low-participation rally.8 This is further reinforced by low positioning in S&P 500 futures (sitting in the 12th percentile over the last five years), and high cash positions as defined by money market assets (sitting in the 92nd percentile over the last five years and just shy of the max level following the onset of the pandemic).9
Fixed income ETF flows: Strength across multiple segments Bond ETFs have now amassed $142 billion this year. This is roughly $13 billion shy of the 2019 record, indicating that 2020’s full-year figure will likely set a new record. If we extrapolate the current year-to-date totals with the historical five-year median flow figure, the estimated full-year 2020 tally would be $183 billion. If we were to take a more aggressive approach and use the 2020 median of $19 billion, the 2020 calendar year flows could reach $220 billion. Either way, the question isn’t whether the 2019 record will be broken but by how much.
Taking a closer look at fixed income ETF flows, we see that only one bond sector had outflows in August, and six out of the eleven sectors had more than $1 billion of inflows, as shown below. The persistence of the inflows is also strong, as the same seven segments (Aggregate, Inflation Protected, Mortgage-Backed, IG Corporate, High Yield, and Municipals) all had inflows on more than 80% of the days in the last one, two, and three months. Some sectors are well north of 90%, having inflows on almost every day in the last few months. While certain segments (Aggregate, IG Corporate, and High Yield) have led in a somewhat concentrated fashion, the strength throughout the bond ETF ecosystem is a larger reflection of increasing usage across many client dimensions leveraging an array of portfolio implementation use cases.
Sector-focused equity ETF flows: Investors favor cyclical segments over defensive In aggregate, sector-focused equity ETFs posted inflows greater than $4 billion last month, marking the seventh month in 2020 with positive flows. As shown below, cyclicals outpaced defensives last month. Put another way, recovery sectors (Consumer Discretionary, Materials, and Real Estate) outpaced recession sectors (Utilities, Health Care, and Consumer Staples) when using the definitions we outlined in our 2019 study . Technology-focused ETFs continued to receive inflows, gaining $1 billion in August, and still lead sector flows year-to-date.
Sector flows have followed returns, to a degree. Technology, Consumer Discretionary, and Industrial stocks all outperformed the S&P 500 in August, and these three sectors had the strongest flows. Beyond that, there is little connection, as returns in the Utilities sector were down on the month, but the segment produced inflows. Short interest noticeably declined in Utilities, so perhaps the inflows were related to short covering.
Overall, as the economy continues to re-open and be on the path to recovery, cyclical sectors are likely to benefit as consumption and industrial activity rebound closer to pre-pandemic levels. The one exception would be Real Estate: The sector has historically done well during recoveries, but the pattern isn’t poised to continue, given the ways in which the pandemic has upended trends in commercial real estate, i.e., less demand for office space given the rise of at-home work arrangements.
Flows into sector funds have topped $20 billion this year, at $24 billion, and that doesn’t include the $15 billion deposited into the nontraditional thematic ETFs Those NextGen Trends funds, after posting a record $3 billion in June and July, took in over $4 billion in August. Their flows were led by funds targeting broad-based innovation, as well as strategies focused on firms creating more renewable forms of power generation. The traditional and thematic flows reflects specific investor behavior trend in 2020 – harnessing elevated dispersion and discretely positioning sectors based on market trends rather than indiscriminately buying broad beta
Looking ahead, investors may need steely resolve As investors go once more unto the breach in a tumultuous 2020, fortitude may be necessary. Three potential tactics are worth considering as we forge ahead:
Diversification – Ensure portfolios are appropriately diversified with potential defensive positions, like gold, that may be able to parry any uptick in volatility.
Don’t panic – Nerves of steel may be required to avoid hasty changes to a strategic asset allocation mix. After all, some of the S&P 500’s best days have followed the worst.10
Focus on the future – COVID-19 has created a new trend line for our society, and new innovative growth opportunities have emerged that may help position us for our new reality.
1A mix of the MSCI ACWI Index and the Bloomberg Barclays US Aggregate Bond Index is up 5.8% year-to-date as of 8/31/2020, per Bloomberg Finance L.P. 2FactSet as of 8/31/2020 3FactSet as of 8/31/2020 4FactSet as of 8/31/2020 5FactSet as of 8/31/2020 6Next twelve-month price-to-earnings ratio is at 26.83, higher than the level 26.4 level in 1999, FactSet as of 8/31/2020 7Based on the MSCI ACWI IMI Index per Bloomberg Finance L.P. as of 8/31/2020 8Trading volumes for August are sitting at the historical median, per Bloomberg Finance L.P. as of 8/31/2020 9Bloomberg Finance L.P. as of 8/31/2020 10“Miss the Worst Days, Miss the Best Days”, Michael Batnick 2019, https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-days-miss-the-best-days/
S&P 500 Index: A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
The views expressed in this material are the views of the SPDR Research and Strategy team and are subject to change based on market and other conditions. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. There is no representation or warranty as to the current accuracy of such information, nor liability for decisions based on such information. Past performance is no guarantee of future results.
Unless otherwise noted, all data and statistical information were obtained from Bloomberg LP and SSGA as of August 31st, 2020. Data in tables have been rounded to whole numbers, except for percentages, which have been rounded to the nearest tenth of a percent.
The research and analysis included in this document have been produced by SSGA for its own investment management activities and are made available here incidentally. Information obtained from external sources is believed to be reliable and is as of the date of publication but is subject to change. This information must not be used in any jurisdiction where prohibited by law and must not be used in a way that would be contrary to local law or legislation. No investment advice, tax advice, or legal advice is provided herein.
Investing involves risk including the risk of loss of principal.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA, AL’s express written consent.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., member FINRA, is the distributor for DIA, MDY and SPY, all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc., member FINRA, is the distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Advisors Funds Distributors, LLC.
THIS SITE IS INTENDED FOR QUALIFIED INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States or as otherwise qualified and permissible under local law. The information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-866-787-2257, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Not FDIC Insured * No Bank Guarantee * May Lose Value