After a tumultuous start to the year, exchange traded fund investors have been easing back into the riskier segments of the market, focusing on income generation and some more defensive strategies that may keep the edge off their stock plays.
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The SPDR S&P 500 ETF (SPY) was on track to become the most popular play of April, attracting $1.8 billion in net inflows for the month through Thursday, according to ETF.com data. SPY, the largest ETF and first U.S.-listed ETF to hit the market, has the most liquid options market of any ETF and tight bid-ask spreads, attractive attributes that has helped the fund attract a large institutional following.
The Vanguard 500 Index (VOO) also brought in $870.9 million this month. While not as active as SPY, VOO has been attracting more long-term investors as the Vanguard option comes with a cheap 0.05% expense ratio, compared to SPY's 0.09% expense ratio.
Additionally, ETF investors funneled about $1.2 billion into the iShares MSCI USA Minimum Volatility ETF (USMV), which selects U.S. stocks based on variances and correlations along with other risk factors, and $547.2 million into the iShares MSCI EAFE Minimum Volatility ETF (EFAV), which provide a low-volatile option for developed overseas markets.
These low-vol theme have grown in popularity as conservative investors turned to this smart-beta strategy in response to the recent market oscillations. The low or minimum volatility strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy focuses on equities that exhibit lower beta, a measure of volatility or systematic risk of a security to that of the overall market. Consequently, minimum volatility portfolios are constructed with securities that exhibit lower market risk or beta, which help limit drawdowns during market pullbacks.
Stock ETF investors are also warming up to the health care sector, one of the worst performing areas of the market, as a potential value play. The Health Care Select Sector SPDR (XLV) saw $643.6 million in net inflows. The health care sector may continue to attract investors as merger and acquisition activity picks up, with Abbott Laboratories (ABT) recently agreeing to acquire St Jude Medical Inc. (STJ) for $25 billion and AbbVie Inc. (ABBV) buying Stemcentrx for $5.8 billion.
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Additionally, investors still demand income-generating assets. For example, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) added $1.0 billion in net inflows this month, Vanguard REIT ETF (VNQ) attracted $767.5 million and iShares TIPS Bond ETF (TIP) brought in $733.3 million.
Yield-generating assets got a new lease on life after the Federal Reserve said it would only hike interest rates two times this year instead of the previously stated four hikes. The return to risk also pushed investors out of more conservative plays and into riskier income-generating assets like corporate debt and real estate investment trusts.
Moreover, Treasury Inflation Protected Securities has done surprisingly well this year as investors tried to hedge their positions ahead of the eventual rise in inflationary pressures, especially with a dovish Fed fanning the flames of rising inflation expectations.
On the other hand, Japan and currency-hedged ETFs continued to bleed assets. The iShares MSCI Japan ETF (EWJ) was the most unpopular ETF of April, experiencing almost $1.3 billion in net outflows. Additionally, the WisdomTree Japan Hedged Equity Fund (DXJ) lost $679.4 million and WisdomTree Europe Hedged Equity Fund (HEDJ) saw $636.3 million in outflows.
The exodus from Japan seems prescient as the Bank of Japan recently stated it won't be changing its monetary policy, catching the markets off guard and triggering a sell-off in Japanese markets.
Meanwhile, with the Fed pushing off interest rate normalization, the U.S. dollar has weakened and foreign currencies have strengthened, diminishing the appeal of currency-hedged international stock ETFs.
Treasury bonds were also among the most shunned assets in the ongoing equity market recovery. For instance, the iShares 1-3 Year Treasury Bond ETF (SHY) saw $1.1 billion in outflows, the iShares 20+ Year Treasury Bond ETF (TLT) shrunk by $1 billion, iShares 3-7 Year Treasury Bond ETF (IEI) experienced $604.3 million in outflows and SPDR Barclays 1-3 Month T-Bill (BIL) lost $520.9 million. Investors have been moving out of government debt as yields on benchmark 10-year Treasury bonds rose to 1.84% from about 1.77% at the start of the month.
Lastly, while gold continued to shine, investors yanked $658.7 million out of SPDR Gold Shares (GLD). Traders may be trying to trim profits after an impressive run, or some may argue that the trade has grown long in the tooth after the depreciation in the U.S. dollar and diminished need for a safe-haven bet.
This article was provided by our partners at etftrends.com.
Full disclosure: Tom Lydon's clients own shares of SPY, LQD and GLD.