Outside voices and views for advisers

ETF money flows, social media and dating Nick

Gauging investor interest in exchange-traded funds in much the same way as Twitter or Facebook tracks online friends

Mar 18, 2014 @ 11:36 am

By Nicholas Colas

colas, etf, exchange-traded funds, facebook, twitter, flows
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(Bloomberg, iStock, Gerardo Tabones)

If you go to a Google search box and type in “I want to date,” the friendly autofill will offer up “Nick” as its first choice. No joke — try it for yourself. Dig a little deeper and you'll find that Olympic skier and bronze medalist Nick Goepper held a “Bachelor”-style contest to find a date under the Twitter hashtag #IWantToDateNick. I was expecting to see a Google autofill suggestion for a member of One Direction or Katy Perry or someone else young, fabulous and single. I was not expecting to see my own name. Nor was my wife. Thankfully, the second and third spots are more predictable: “My best friend” (just kiss them, already!) and “My teacher” (Come on! A thousand times NO!).

If the Internet has done one useful thing for society, it allows us to track exactly who is truly famous. We know who would get picked first for celebrity dodge ball, and who would be left to the embarrassing last choice. A few quick points:

• If you go by Twitter followers, Katy Perry and Justin Bieber rule the roost with +50 million followers apiece. Ill-considered marriages and random acts of spoiled celebrity don't matter to real fans. Just behind them are President Obama, Lady Gaga and Taylor Swift, in the low 40 millions and counting. Britney Spears beats Justin Timberlake (36 to 31 million) and Shakira (24 million followers) has more followers than the Wall Street Journal, New York Times and Washington Post. Combined.

• Ranked by Facebook likes, the winners are Rihanna (85 million likes, as of February 2014), Eminem (81 million), Shakira (81 million) and soccer star Cristiano Ronaldo (73 million). Katy Perry and Justin Bieber are doing OK (63 and 62 million likes) but they get trounced by both the deceased (Michael Jackson at 70 million likes) and the imaginary (Harry Potter at 68 million).

• Looking at popular websites around the world, courtesy of alexa.com, and you'll see the usual suspects: Google, Facebook and YouTube are numbers 1 through 3. Past that, you'd better be pretty worldly to know your top web destinations. Baidu beats LinkedIn (No. 5 versus No. 8). Taobao, a Chinese online retailer, is No. 9 on the alexa list. Amazon is No. 12 and eBay is No. 24.

Thanks to their transparency, U.S. listed exchange traded funds are essentially a one-stop-shop to gauge a whole range of market interest, in much the same way as Twitter or Facebook allow this kind of analysis online. ETFs, in fact, are better — their settlement and clearing processes are a good deal more open than the murky online world of “likes” and “follows.” And, for all the concerns voiced over the last five years of ETF asset growth, these products have co-existed quite benignly with their underlying stock, bond and futures asset classes. Yes, watching the money flows around ETFs may not get you a million Twitter followers like an Oscar selfie, but it is a lot easier to calculate what they are actually worth.

Thus far in 2014, ETF flowshave been about as predictable as Alec Baldwin in front of a paparazzo's lens. The overall year-to-date numbers, with inflows of $8 billion, are well below the +$10 billion monthly run rate we're used to seeing from this portion of the money management industry. U.S.-listed ETFs didn't get to $1.7 trillion in assets under management by growing a few billion dollars a month. In the last month, however, the picture has improved considerably. Here are our key takeaways:

• For the year-to-date, ETF money flows look distinctly risk-averse. That wobbly $8.0 billion net inflow number is from one large dent — the $16.1 billion in outflows from SPY (SPDR S&P 500 ETF). Two other ETFs — EEM (iShares MSCI Emerging Markets ETF) and VWO (Vanguard FTSE Emerging Markets ETF) — also show more than $3 billion in outflows each. Conversely, flows into fixed income ETFs through all of 2014 total $8.8 billion positive — essentially all the new capital put to work in ETFs this year. Parse that information more finely and you'll see even more-distinct levels of risk-averse investor behavior, for many of the top drawing funds are short-duration-bond products or very well- diversified fixed-income offerings.

• In the last month, everything has changed. Well, not everything — but a lot. Yes, emerging- market-equity funds still see outflows, to the tune of $3 billion over the last four weeks. But the overall pace of ETF inflows is $21.2 billion over the same period. U.S. equities are the net beneficiaries, with all that capital flowing directly into domestic markets once you net out all the other asset classes we track. Redemptions out of fixed income products, by comparison, totaled $8.9 billion over the past month.

• The real turnaround has been in commodity funds, especially those dedicated to precious metals. The one month numbers are small here — just $1.6 billion in aggregate, but that's a notable shift from the $23.4 billion in outflows over the past year.

• Real-estate-focused funds are the steady-Eddies of the ETF world at the moment. Their one-month (+$2.2 billion), year-to-date (+$3.5 billion) and one-year (+$3.6 billion) flows are all positive; the only asset class we track to be able to make that claim.

• As far as directional and leveraged trading calls, ETF money seems interested in just two directions: straight-up long and Inversed leveraged short. Year to date, “no leverage” is up $5.6 billion in fresh money and inverse leveraged has received $2.billion in new capital. Over the last month, those numbers are $21 billion (no leverage) and $1.2 billion (inversed leveraged).

• As far as industry sectors go, the last month's “rush to risk” has favored health care ($1.8 billion in fresh money), energy (+1.8 billion) and basic materials ($769 million). Sectors with redemptions include: Industrials ($1.1 billion out) and consumer non-cyclical ($494 million out). It would be easy to chalk up the move out of industrials to the weakness in Chinese economic data, but the inflows to basic materials are puzzling in that context.

• We're not especially vocal fans of the “Great Rotation” school, where money flees fixed income and migrates to equities, but in fairness that's exactly what has happened in the last month. Global sovereign- debt (U.S. included) ETFs saw $11.6 billion in outflows over the past month, with $9.2 billion from U.S. Treasury funds.

Our takeaway from such data is clear, if quite unexpected: There is real money starting to chase equities higher. Yes, the first part of 2014 felt twitchy. Equity fund flows — and performance — had been very strong toward the tail end of last year and the first half of Q1 2014 felt like investors were unsure if they had gotten too long, too fast. But the data from the last month is much more sanguine, at least in the short term. China may be slowing, and the Ukraine is a global wild card, but investors are putting money to work in risk assets. Right now.

Asset owners may not be ready to plunge into the deepest part of the pool — emerging-markets equities — just yet. They do, however, want to get out of the fixed-income shallow end. That puts them somewhere in the middle, and that's enough to support a move higher into the end of the first quarter of 2014.

Nicholas Colas is chief market strategist at ConvergEx Group, a global brokerage company based in New York.


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