ETF Fund Flows Signal Large Cap Exit

Exchange-traded funds have a myriad of advantages over mutual funds that include their inherent transparency, liquidity, low-cost, and tax-efficiency. 

Because of this embedded liquidity and transparency, we have the ability to track asset flows on the entire universe of ETFs in order to discern which funds investors are pouring their money into and which funds they are getting out of.  Analyzing this data can provide some intriguing insight into the psychological nature of performance chasing and perceived value.    

According to the fund flows tool at ETF.com, investors have been exiting large-cap stocks at a breakneck pace this year.  The SPDR S&P 500 ETF (SPY) has lost $43.7 billion in total assets on a year-to-date basis.  This fund tracks the market bellwether S&P 500 Index and is one of the most heavily traded ETFs in the world on a daily basis.

From a performance standpoint, SPY has posted an anemic gain of less than 2 percent this year.  When combined with fund flow data, this may signal that investors are losing patience with the momentum in U.S. stocks and are instead searching out other opportunities or waiting on the sidelines in cash. 

Seven of the top ten ETFs with the largest fund flows this year are represented by broad-based or sector-specific large cap U.S. stocks.  In addition to SPY, this includes crowd favorites such as the PowerShares QQQ (QQQ) and Financial Select Sector SPDR (XLF). 

So where is the hot money going instead?

International ETFs with a currency-hedged strategy have garnered the most assets and appeal to the sentiment shift towards a rising U.S. dollar.  The WisdomTree Europe Hedged Equity Fund (HEDJ) and Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF) represent the two top funds for net inflows this year.  HEDJ has attracted $13 billion in assets, while DBEF has accumulated $9.3 billion. 

Interestingly enough, seven of the top ten ETFs with the largest inflows are international funds.  Four of those seven are currency-hedged strategies such as HEDJ and DBEF.  These relatively new products have become increasingly attractive as investors seek to reduce the impact of currency fluctuations on their international holdings.