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June Flash Flows: A Partial Pivot in Sentiment?

  • ETFs took in $77 billion in June, pushing Q2 flows to $215 billion and the first half to a record $466 billion – 90% more than the prior first half record
  • For the 11th month in a row, cyclical sectors (+$2.4 billion) beat defensives (+$581 million). However, growth ETFs had their best month ever while outgaining value
  • Bond ETFs took in $20 billion in June and are on pace to break 2020’s full-year record. Loan ETFs have more flows in 2021 than in the prior eight years combined
Head of SPDR Americas Research

Equity markets continued to rally throughout June, undeterred by the Federal Reserve (Fed) slightly altering its monetary policy outlook at its latest meeting. Yet, beneath the surface there was an apparent pivot. Alongside a decline in rates, leadership moved away from reflationary trades toward more secular and quality growth themes.

For US equities, growth outperformed value by 7.5%, the largest outperformance since 2000.1 In fact, this 7.5% of outperformance ranks in the 99th percentile historically and is the third-best monthly rate ever.2 Large caps relative to the more cyclical small caps produced a similar trend – outperforming by 2.3% in June.3

But to what degree will this pivot be sustainable, or ultimately successful? Given the dynamics of the recovery, this pivot, may end up as well orchestrated and executed as when Ross had Rachel and Chandler help him move a couch up a narrow staircase on an episode of Friends.

This doesn’t mean that the investors who pivoted to growth will get sawed in half like the couch did in the end. Rather, the market activity witnessed over the past month will likely be revealed as more of a pause than a full-on pivot away from cyclicals. And the reflation/cyclical trade is likely to continue throughout the rest of 2021 as growth remains strong and pushes rates higher.

Four variables support this view: strong earnings for cyclicals, improved economic data, supportive policy environment, and vaccine rates are outpacing case rates.

But this overall view is not without its risks. Low liquidity in the summer months may exacerbate any idiosyncratic news events that could spur a risk-off move, impairing sentiment toward risk-on cyclical exposures. After all, the Fed’s dot-plot surprise was one of the sparks to the technically driven drawdown in reflation trades.

Flows Indicate No Slowing of Rally Positioning

Investors once again turned to ETFs to deploy capital across a variety of strategies. ETFs had $77 billion of inflows last month, fifth-best all time and the eighth consecutive month of more than $50 billion of inflows – a record streak. Given this strength, flows for the second quarter (+$215 billion) were the most ever for a Q2, and represent the second-largest flows ever for a quarter – roughly $35 billion shy of the record from Q1 (+$251 billion).

With Q1 and Q2 flows representing the top two quarters of all time, naturally the flows for the first half of 2021 also broke records. Flows for the first half totaled over $465 billion – a figure that is 90% more than the prior record for a first half (2017, $242 billion). This current period would also be more than any other full calendar year total, except 2020’s record $503 billion.

Over the past 12 months, flows into ETFs have averaged $63 billion a month. If that continues in July, ETFs could break the full-year record as early as next month. And if that pace continues for the rest of the year, full-year flows could approach $900 billion. As shown below, if the second half of 2021 were to be merely average, based on the prior five-year average of second half flow totals, flows would total more than $700 billion – a 40% increase above 2020’s number.

First Half versus Second Half Flow Figures ($ Billions)

Source: Bloomberg Finance, L.P., State Street Global Advisors, as of June 30, 2021. Past performance is not a guarantee of future results

Equity ETFs took in $56 billion in June, their fifth-best month ever and 13th month in a row of inflows – seven months shy of 2018’s record. All geographical segments posted inflows in June, and no areas are in outflows year to date – a sign of the persistent and broad-based nature of the capital deployment from investors amid this rally.

Flows into regional funds represent the strongest year-to-date figure, on a relative basis – a segment led by a reversal of sentiment toward Europe. Following $3 billion of flows in June, flows into European focused equity strategies have broken past the historical 90th percentile over the past three months

Equity fund flows are getting most of the headlines this year, yet despite the fanfare, the strength of the fixed income ETF market should not be lost on anyone. For starters, the $20 billion of inflows in June pushed full-year 2021 totals to $110 billion. This is the most inflows for fixed income ETFs for any first half ever – and 234% more than the typical first half bond flows. Prorating the strength from the first half to the second half, it is highly likely that fixed income ETFs break their 2020 record haul (+$210 billion) this year.

Asset Class Flows

Source: Bloomberg Finance, L.P., State Street Global Advisors, as of June 30, 2021. Top two and bottom two categories per period are highlighted. Past performance is not a guarantee of future results.

Cyclical Sectors Still Sought

Sector funds had $3 billion of inflows in June, their ninth month in a row with inflows – two months shy of the record from 2008/2009 when sector funds had inflows for 11 months in a row. Like they have been all year, the sector flows in June were fueled by investors’ interest in cyclical segments.

Cyclical sectors took in $2.4 billion, their 11th month in a row of more flows than defensives. Flows into Real Estate (+$4 billion) were the strongest, followed by Materials (+$1.4 billion). We discussed the potential opportunity in Real Estate in a recent note.

But it was not all-in for cyclicals, as Financials, Industrials, and Consumer Discretionary had outflows. Yet, even with outflows in June, Financials still lead year to date with $21 billion of inflows.

Sector Flows

Source: Bloomberg Finance, L.P., State Street Global Advisors, as of June 30, 2021. Top two and bottom two categories per period are highlighted. Past performance is not a guarantee of future results.

Fixed Income Positioning Still Reflationary

Bond funds had more than $10 billion of inflows in June, their 22nd month out of the past 23 and their 15th month in a row. In fact, every bond sector we track had inflows in May, except High Yield.

With $7 billion of inflows in 2021, following their fourth month of over $1 billion of inflows in June, loan ETFs have now taken in 84% of their start-of-year assets. The interest in loans also stems from their structural floating rate traits, and points toward investors further positioning in a risk-on/cyclical/reflationary/higher rate light.

Bond investors also have continued to steadfastly position for a reflationary regime shift – evidenced by the $3 billion of inflows into TIPS ETFs in June – their 14th consecutive month of more than $1 billion of inflows.

Fixed Income Sector Flows

Source: Bloomberg Finance, L.P., State Street Global Advisors, as of June 30, 2021. Top two and bottom two categories per period are highlighted. Past performance is not a guarantee of future results.

Not so Much a Pivot, but a Brief Break

The lackluster returns for cyclicals last month have improved their valuations, however.4 As a result, the reflation trade now has not only higher growth prospects but also a more attractive entry point. Therefore, if the view above holds, it is likely we could see cyclicals regain market leadership over the next few sessions – meaning that June’s pivot would be seen more as investors just being “on a break” with the reflation trade.

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