November Outflows Reflect ETF Investors' View On Fed

With just 5 1/2 trading days left in November, it is clear that participants in the exchange traded funds market are betting that the Federal Reserve will raise interest rates next month. A recent survey of fund managers confirms as much as the participants expecting higher interest rates next month is around 80 percent, up from 47 percent in October. 

Subsequently and not surprisingly, ETF investors are scurrying out of fixed income funds, previously one of the hottest corners of the ETF market. Nine of this month's 10 worst ETF offenders in terms of lost assets, as tallied by ETF.com, are funds that sensitive to higher interest and five of those nine are bond funds. Conversely, there is just one fixed income ETF among November's top asset gatherers.

"Investors in U.S. exchange-traded funds have sold the most bonds in November in five months as they prepare for the Federal Reserve to raise interest rates," according to Bloomberg.

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A month ago, four of the top five asset-gathering ETFs and five of the top 10 overall to start the fourth quarter were bond funds.

The iShares 1-3 Year Treasury Bond ETF SHY and the SPDR Barclays High Yield Bond ETF JNK, the second-largest high-yield corporate bond ETF, have lost about $2.5 billion combined this month. Investors have also yanked $587.4 million from the iShares iBoxx $ Investment Grade Corporate Bond ETF LQD and $762.4 million from the iShares 7-10 Year Treasury Bond ETF IEF, according to ETF.com data. That makes the $371.4 million pulled from the iShares 20+ Year Treasury Bond ETF TLT seem piddly.

Although money is leaving plain vanilla bond funds at a feverish pace, traders have been embracing leveraged equivalents this month. For example, the Direxion Daily 20-Year Treasury Bear 3X Shares TMV has lost a small amount of money this month while the ProShares UltraShort 20+ Year Treasury TBT has bled nearly $16 million.

Still, TMV has hauled an impressive $217.5 million year-to-date. The Direxion Daily 7-10 Year Treasury Bear 3X Shares TYO has not gained or lost any money this month, but volume has been increasing in that ETF. For the five days ended November 19, TYO's volume was 33 percent above the trailing 20-day average, a total exceeded by just six other Direxion ETFs, according to issuer data. Over the past month, TYO has averaged positive creation activity on a day-to-day basis.