It's the end of an era.
Since 2008, the vast majority the flows in and out of certain exchange-traded funds (ETFs) have been driven by what the Federal Reserve was doing or saying. One word spoken by Former Fed Chair Ben Bernanke or his successor, Janet Yellen, would send billions in and out of the same ETFs in the same patterns. But this year is different as the Fed—and the fear of rising interest rates—have taken a back seat to a more natural cause: the fear of a collapse in the stock market.
The evidence of this is widespread but perhaps best symbolized by the asset levels of a couple of leveraged ETFs. The ProShares UltraShort S&P 500 ETF (SDS), which provides 200 percent inverse exposure to the S&P 500 index, has just regained its former status as the largest leveraged ETF—ending a six-year reign by the ProShares UltraShort 20+ Year Treasury (TBT). For years, TBT towered above SDS and the rest of the pack as the go-to tool to bet on, or protect against, rising rates. In other words, TBT was a way to Fed-proof a portfolio. Now investors are looking to stock-proof their portfolios.
SDS has taken in more than $1 billion this year, doubling its size to $2.2 billion, while TBT's outflows have helped cut its size in half to just under $2 billion over the past two years. Cementing this trend even further is the $1.5 billion that has gone into the ProShares Short S&P 500 ETF, which is basically a one-times version of SDS. Both of them are now larger than TBT, which has slid to third place.
This stock-proofing can be seen elsewhere. For example, the SPDR Gold Trust (GLD) has taken in $10 billion, nearly double any other ETF. In the past, GLD flows were more about its role as an inflation hedge as the Fed "printed money." Now it’s being used a crisis hedge with flows coming in steadily since the first day of the year. This indicates a consistent and mounting fear as opposed to a short-term dance around the U.S. central bank.
There's also been the $13 billion into low-volatility ETFs as investors decide to forego some upside to limit the downside. The low-vol ETF craze has officially replaced currency-hedged ETFs as the hottest trade for ETF investors. And it isn’t just the U.S. market where investors want a smoother ride; as low-volatility ETFs tracking international developed, emerging markets have seen billions in new cash. Even the low-volatility small cap (arguably an oxymoron) ETFs have seen inflows.
More evidence of this comes from the world of fixed income, where bond ETFs with the highest flows were typically those focused on either short-term or long-term U.S. Treasuries. In other words, flows have largely been about positioning on the yield curve in preparation for a rate hike or lack thereof. This year it’s about safety, as aggregate bond ETFs that lack a clear bias in favor of the short or long term have led inflows with a combined $15.6 billion in new cash.
Aggregate bond ETF flows are about investors rebalancing their portfolios as they trim their core stock positions and beef up their fixed income allocations. As such, the bond ETF with the most flows this year is the iShares Core U.S. Aggregate Bond ETF (AGG) with more than $6 billion in new cash, second only to GLD. The other big aggregate bond ETF—the Vanguard Total Bond Market ETF (BND)—has also hauled in $2.7 billion.
While the Fed has been, and most likely will be, the biggest variable in driving ETF flows, right now it seems investors have bigger fish to fry.
Eric Balchunas is a senior ETF analyst for Bloomberg Intelligence. This piece was edited by Bloomberg News. More ETF research can be found on terminal at BI ETF <GO>