Watch out for stock ETFs with the largest inflows

For advisers, checking monthly flows for stock funds might be a useful exercise.

Jun 7, 2018 @ 2:01 pm

By John Waggoner

You've probably warned clients against buying the hottest exchange-traded funds. You should also warn them against buying stock ETFs with the largest inflows, according to a study by the Leuthold Group.

The stock ETFs that had the highest inflows over the previous one, two and three months underperformed during the next 12 months, Leuthold found. The research group looked at inflows as a percentage of month-end assets and then divided the ETFs into fifths, or quintiles, according to inflows.

Stock ETFs with the highest one-month inflows lost an average 0.1% over the next month, versus average gains of 0.37% to 0.41% for those in the other four quintiles. The study looked at ETFs from 2006 through April of this year. A similar pattern emerged using two- and three-month flows. From April 2006 to April 2018, investing in the ETFs with the largest inflows resulted in an 8% loss.

"The main story behind the numbers is the old classic that investors are return chasers, and in a bull market, they throw money at whatever is working," said Scott Opsal, director of research and equities at Leuthold. (The study was created by Leuthold research analyst Jun Zhu.)

Unfortunately, they also tend to come late to the party, and often invest just as the fund is peaking.

The problem is particularly acute with stock ETFs, Mr. Opsal said. "As [Vanguard founder] Jack Bogle said, ETFs are too easy to trade and to trade quickly. You're betting on an idea and a price chart — you're not trying to understand the real business because there isn't one. They draw people in to chase the chart, and that's not an optimal strategy."

The study found little relationship between bond inflows and performance, Mr. Opsal said. "Investors don't usually buy bonds for short-term returns — they buy for stability and income, and they don't think of trading in and out every three months."

For advisers, checking monthly flows for stock funds might be a useful exercise.

"If I were going to put an ETF in a portfolio and saw it had a high inflow, I'd be willing to wait it out a couple months and see what happens," Mr. Opsal said. Doing so might lead to a more level-headed approach — and increase returns over the long run.

(More: International ETFs ready for takeoff)

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Ron Carson: If you aren't growing you're dying

There are two group of advisers, according to Ron Carson: Those that are expanding and those that are just "hanging on." So, which group do you belong to?

Latest news & opinion

LPL rolls back recruiting policy aimed at driving more assets to its corporate RIA

LPL erases $50 million hurdle for new advisers to join so-called hybrid firms.

Don't be fooled by the numbers — the industry is in a dangerously vulnerable state

Last year's stock market gains helped advisers turn in solid growth in assets and revenue, but that growth could disappear in the next market downturn.

Divided we stand: How financial advisers view President Trump

InvestmentNews poll finds 49.2% approve of his performance, while 46.7% disapprove. How has that changed over the course of his presidency?

10 states with the most college student debt

Residents of these states have the most student debt when you consider their job opportunities.

Ex-Wells Fargo brokers sue for damages, claiming they lost business in wake of scandals

In a Finra arbitration complaint, two brokers allege that Wells Fargo's problems damaged their business.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print