ETF Flows Highlight Pressured Sectors During the S&P 500, Dow Rout

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Talking Points:

  • Equities finished significantly higher Friday but the S&P 500 lost 4.1%, Dow 4.2%, and Nasdaq 3.7% for the week
  • ETF flows show many investors thought Wednesday was a great dip-buying opportunity only to be burned on Thursday
  • Long-term treasury bonds saw robust inflows while corporate debt was cast aside during the rout

The second week of October delivered a considerable amount of volatility to markets, even more so than the first. Despite Friday’s rally, the S&P 500, Dow, and NASDAQ all closed significantly lower for the week. They now trade nearer their mid-year levels with months of gains wiped away.

While the sell-off was convincing on the surface, not all investors shied away from picking up cheaper shares in the midst of a rout.

S&P 500 Hourly Price Chart October 2018

S&P 500 price chart october

The SPY, VOO, and IVV ETFs were one area investors looked to for equity exposure. For the week, the aggregated fund flows resulted in a net outflow of $1.26 billion. The most significant outflow occurred on Thursday at $6.4 billion. This is well within range and is actually quite underwhelming for such a volatile week.

Looking to October as a whole, the funds have seen an inflow of $2.79 billion. During this same period the S&P 500 has surrendered 156 points or -5.35%. Interestingly, the volatility October has brought with it does not seem to have spooked investors. However the HYG ETF, which tracks high-yield corporate bonds, was one area that saw massive outflows during the week.

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Aggregate Fund Flows for IVV, SPY, VOO ETF vs. S&P 500 Performance

ETF Flows Highlight Pressured Sectors During the S&P 500, Dow Rout

The HYG ETF saw a record $1.2 billion flow out of the fund on October 5th. The outflow is equal to roughly 9.2% of the funds market capitalization. Since the start of October when rising yields became a worry of markets, investors have pulled $1.89 billion from the fund. While the follow-through of an equity rout is in question, the falling demand for corporate bond exposure is not. The consistent and robust outflows relative to market capitalization suggest investors have no interest in holding corporate bonds when government yields are rising. As government bonds are effectively risk-free, the risk-premium offered by corporate bonds is proving unattractive at this time.

High-Yield Corporate Bond (HYG) ETF Fund Flows Vs S&P 500 Price Chart

ETF Flows Highlight Pressured Sectors During the S&P 500, Dow Rout

Next week has yet another sparse economic calendar beyond Fed minutes and a possible Brexit break-through over the weekend.

View our Economic Calendar for important data releases in the upcoming week.

As earnings season begins, next week’s fund flows article will include the NASDAQ tracking QQQ ETF and the impact of FANG member Netflix’s earnings on the broader fund. Should equities remain pressured, it will be interesting to see if investors look to gain exposure in what has typically been one of the fastest growing ‘tech’ companies.

–Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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