3 big surprises in ETF flows so far in 2015

With February almost over, we revisit where U.S.-listed exchange-traded fund money flows are pointing. At the beginning of the year, the answer was “nowhere.” Things have since picked up a lot. One-month flows into ETFs now stand at over $30.7 billion, putting year-to-date inflows at $23.9 billion.
Big surprise No. 1: U.S. equities may be at all-time highs, but year-to-date flows are negative $18.4 billion, thanks to $28.7 billion out of SPY (the largest U.S.-listed ETF).
Surprise No. 2: Fixed-income ETFs are the big winners year-to-date, with $20.1 billion of fresh money — 85% of the total ETF flows so far in 2015.
Surprise No. 3: Commodities are back in a big way, with $5.4 billion of inflows. Some $2.8 billion of that went into gold funds and a $3.3 billion into energy-based investment products.
POPULAR ON TWITTER
The most popular word on Twitter isn’t a word; it’s a picture of a heart. Yes, technically, that’s an “emoticon” — a picture that represents a feeling — rather than a word. Regardless of semantics, according to research done by data hounds FiveThirtyEight (the same people who call every U.S. election like they have tomorrow’s paper) the heart emoticon is the most used “word” on the social media site. Moreover, you can track the popularity of all emoticons used on Twitter in real time on www.emojitracker.com. For what it’s worth, here are the top 10 as of Monday afternoon:
• “Heart” is still #1
• A face crying tears of joy
• A smiling face with heart-shaped eyes
• An “unamused” face
• The classic smiley face
• A hand making an OK sign
• A blushing smiley face
• An upset crying face
• A face throwing a kiss
• A weary/tired face

While this all may seem a touch juvenile, there is some method in the madness. First, emoticons are universal, so they are easier to track across languages than actual words. They also tend to be used more honestly, rather than in sarcasm or irony. Also, the data comes across in real time — that tracker website mentioned above has a warning for those given to seizures caused by flashing lights because the data updates so quickly. So, for better or worse, the true “mood” of global online society is probably better measured by pictures than actual words.
What surprised me about the most popular emoticon list is that “surprise,” shown as a wide-eyed face with flushed cheeks, is down in 15th position. Perhaps the youthful population that tends to use these pictures thinks it’s not acceptable to express amazement, astonishment or shock. Or, to paraphrase octogenarian Don Rumsfeld, perhaps “they don’t know what they don’t know.”
Surprise is much more a byword of the investment community; it’s pretty much the only legitimate explanation for what moves asset prices. Corporate earnings, economic headlines and policymaker statements — if it’s not surprising, it’s not all that important. Active management tries to ferret out surprises before they occur. Passive management accepts that idiosyncratic surprises are a fact of life and relies on larger macro trends to carry the day.
We regularly review the money flows into and out of U.S. listed exchange traded funds, using data from www.xtf.com, our go-to source for this information, looking for surprising data that help explain moves in asset prices. Earlier in the year, the big surprise there was little in the way of money flows to discuss — just a few billion dollars in the door for an industry that typically pulls in $10 billion-plus a month.
As we close out February, the $2 trillion domestically listed ETF business has plenty of surprises to offer. As we scanned the data, here are the three most notable:
NOTABLE SURPRISES
No. 1: U.S. stocks are celebrating new highs, but ETF investors are following the old trading adage, “Instead of yelling, you should be selling.” ETFs that invest in domestic stocks hold $1.1 trillion in assets under management — the single-largest slice of the ETF pie. Year-to-date, however, they have pulled $18.4 billion out of this asset class. The largest ETF in the U.S. market — the SPY — has taken the worst of this hit, with outflows of $28.7 billion. Investors are rooting around in the bargain basement, however: Flows into U.S. energy names total $3.6 billion. On the growth side of the street, health care has inflows to the tune of $2.2 billion, but technology sector flows are negative $2.6 billion year to date. Financials are still persona non grata in many portfolios, with outflows of $4.9 billion.
The bottom line is that equity investors are picking their spots with a great deal more care, even as the U.S. bull market gets ready to celebrate its sixth birthday next month.
No. 2: Bonds are hotter than Jack Nicholson at an ’80s Oscars after-party. Forget about a measly six-year rally for stocks; investors want in on the longest bull market since World War II. Fixed income has largely been in rally mode since Paul Volcker tamed inflation in the early 1980s, but historically low interest rates are no match for ETF investors looking for yield at any price. Fixed-income funds are just $315 billion of the $2 trillion ETF market in the U.S., but investors have added $20 billion here. Most of this — $15.6 billion — comes from demand for U.S. paper, so it’s not that ETF investors are directly trying to front run the European Central Bank’s impending bond-buying program.
In many ways, these flows are the single most surprising aspect of ETF money flows so far this year and signal that there’s still ample appetite for fixed-income investments, even at near-record low yields.
No. 3: As LL Cool J said, “Don’t call it a comeback” — commodity funds have been here for years … But they are once again the flavor of the hour, with $5.4 billion in fresh money year to date, or 23% of all ETF money flows in 2015. No surprise, but gold (over $2.8 billion in new money) is drawing significant interest on the back of the ECB bond-buying program even as silver funds are essentially flat on the year for flows. Oil ETFs are also drawing fresh money, despite structural issues that keep them from tracking spot prices. Inflows are $3.3 billion-plus. All the cold weather has put a spark under natural gas price linked ETFs, with year-to-date inflows of $246.6 million.
What’s most interesting is that investors aren’t afraid to try to catch the falling knife of oil prices or to call a rebound in gold.
In summary, how you interpret these data comes down to whether you invest with a touch of go-along passivity or a contrarian’s skepticism. Those outflows from U.S. equities aren’t just going to bonds; $4.3 billion went into the equity markets of developed economies overseas.
That is the “big trade” of 2015 writ small through the lens of ETF money flows: out of the U.S., where the central bank’s bond-buying work is done, and into Europe and Japan, where it is just starting or still underway. So far it has worked — that’s why the money is following. No surprise there.
Just remember, however: Surprise moves markets.
Nicholas Colas is chief market strategist at Convergex. This blog originally appeared here.