Trump win sparks multibillion dollar ETF spree

The stock-market euphoria that followed Donald Trump’s presidential victory saw traders snap up risk-asset ETFs as they largely shrugged off the prospect of higher interest rates that threaten to dent some of those strategies.

In total, roughly $18 billion of fresh money was added to exchange-traded funds focusing on US equities Wednesday. That’s almost 16 times the daily average inflow this year, data compiled by Bloomberg show.

Flows largely reflect the “Trump trade,” or bets that the president-elect will take a looser regulatory stance on industries like banking and crypto, while supporting companies with most of their operations in the US. 

The iShares Russell 2000 ETF (ticker IWM), which tracks small-cap stocks, saw a $3.9 billion net inflow — the biggest one-day haul in over 17 years — on Wednesday. The SPDR S&P Regional Banking ETF (KRE) pulled in its largest single-day inflow on record, while a State Street Corp. fund tracking financials stocks drew $1.6 billion, the most since 2016.

ETFs tracking high-yield bonds, Bitcoin, and industrials stocks also raked in net inflows, data from Bloomberg show.  Investors added $112 million to Cathie Wood’s ARK Innovation ETF, an offering that counts Tesla Inc. and Coinbase Global Inc. among its top holdings, at the fastest pace since July.

But, while Trump’s victory set off a torrent of buy signals across equities, bond traders have been selling US Treasuries and pushing yields higher on concern that his fiscal policies will re-ignite inflation and add to the national debt. Higher yields are likely a boon for banking stocks, however, they pressure more rate-sensitive trades, like small-caps and speculative tech stocks. 

“There is a risk to all equities if interest rates keep climbing. The 10-year Treasury yield is 50 basis points above the S&P 500 earnings yield. If that spread grows considerably for a sustained period it will weigh on equities,” said Michael O’Rourke, chief market strategist at JonesTrading. “While small-caps do benefit more from lower interest rates, a continued move higher in rates becomes a problem for everyone.” 

So far though, equity traders are powering full-steam ahead into stocks, with many seeing their bets on Trump paying off. In another sign of market confidence, one-month call skew in iShares’ IWM hovered around the highest levels since 2008, signaling further demand for bullish options relative to bearish ones.

The S&P 500 extended gains Thursday after notching its 48th record this year in the previous session. S&P 500 Index-tracking ETFs from Vanguard Group Inc. and BlackRock Inc. have each pulled in over a billion dollars this week. Investors piled $4.6 billion into the SPDR S&P 500 ETF Trust (SPY) on Wednesday, adding to the world’s largest ETF for the sixth consecutive session.