Investors Unchain Themselves From ETFs as Stock Volume Surgesby
S&P 500 share trading climbs to five-year high versus SPDR ETF
Some see less passive approach as a bullish market signal
Individual stocks are hot again, with investors eschewing passive strategies and piling into single shares at the fastest pace in five years. It’s the latest sign of calm returning to the equity market after last August’s meltdown.
Among Standard & Poor’s 500 Index constituents, about 2.3 billion shares have changed hands each day since early November, compared with 106 million a day in the SPDR S&P 500 ETF Trust, the biggest such security tracking the benchmark gauge. The ratio between the two has almost doubled since reaching a four-year low in September and on Nov. 30 hit 24, the highest level in almost six years, data compiled by Bloomberg and FBN Securities Inc. show.
A rising appetite for individual shares is a hallmark of easing tension in the stock market as investors drop their obsession with economic and political shocks and focus on the ability of companies to boost earnings or be taken over. Demand is rising after the S&P 500 recovered from its first correction in four years, returning to a range that has confined stocks for most of this year.
“When fears calm, managers go back into the stock-picking mode, which causes the ratio to turn higher again,” JC O’Hara, the New York-based chief market technician at FBN Securities. That’s “typically bullish for the market,” he said.
Another explanation is that with the Federal Reserve about to raise interest rates, investors would rather not take what the market has to offer, and are therefore shunning ETFs, said John Goltermann of Obermeyer Wood Investment Council.
“When we get to a flat and more volatile environment, people may be questioning the theory that passive investing is going to be the way to go forward,” said Goltermann, who helps oversee $1.7 billion at Obermeyer as a partner in Aspen, Colorado. “They may be making a shift and considering more active investing versus passive.”
Money flow still favor ETFs. Actively managed mutual funds have seen withdrawals every month this year starting in March, while ETFs attracted more than $30 billion over the past 11 months, data compiled by Bloomberg and Investment Company Institute show.
To FBN’s O’Hara, the individual-to-ETF volume ratio has occasionally signaled sentiment shifts in the past. When it approached 24 in December 2010 and stayed above the level for the following two months, the S&P 500 advanced 12 percent over the period. The gain compared with an average three-month return of 3.6 percent since 2009.
“When investors have a better feel on the market, they make individual stock bets,” he wrote in a note earlier this month.