ETF Investors Are Hoarding Cash On Stock Volatility

The recent volatility in the stock market has brought to light many unique products that take advantage of investor fear. This includes inverse, leveraged and VIX futures funds such as the iPath S&P 500 VIX Short-Term Futures ETN (VXX).

While those aggressive vehicles garner exciting headlines for fast-paced moves in the trading community, it is generally too speculative for most investors.

So where are ETF investors hiding out during this tumultuous period?

The answer, not surprisingly, is cash and short-term Treasuries. According to fund flow data from October 15 to October 21, the top two ETFs for net inflows were the iShares 1-3 Year Treasury Bond ETF SHY and iShares Short Treasury Bond Fnd SHV.

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SHY gained nearly $2 billion in assets, while SHV increased its total by more than $1 billion over the last week. On the flip side, the SPDR S&P 500 ETF SPY lost nearly $10 billion during that same period.

Often times investors that are anticipating a deeper correction will trade in their risk assets such as stocks and commodities for short-duration Treasuries, which are considered safer instruments.

However, with interest rates trading near historical lows, these short-term Treasury bond ETFs offer a very meager yield. As an example, SHY offers a 30-day SEC yield of just 0.33 percent. That's one third of 1 percent per year for the privilege of owning a credit-risk free ETF with very low sensitivity to interest rates.

This spike in inflows to short-duration Treasury ETFs is likely the result of large portfolios seeking short-term holding places instead of a traditional money market fund. However, that can certainly develop into a longer term hiding spot if stocks remain on uncertain footing.

ETF fund flows are known to chase top performing areas of the market, particularly when trend changes force the hand of investors looking to shelter their gains or profit from new opportunities.