Investors Braced For the Worst Last Month, ETFs Reveal


In a month dominated by speculation over Brexit vote, exchange traded fund flows over June revealed that investors hedged riskier equity bets with gold and low volatility options.

Gold ETFs have been the shining asset category of the year and June inflows showed that the precious metal still held a lot of appeal. Last month, the SPDR Gold Shares (NYSE:GLD) attracted a robust $3.3 billion in net inflows, according to

Gold has been the go-to, safe-haven asset in a year marked by volatility, and it was no different in the weeks ahead of the United Kingdom's referendum vote on its European Union membership. Traders also maintained their gold positions on the depreciating U.S. dollar and the extended low rate outlook from the Federal Reserve, betting that precious metals will continue to be a good store of wealth and also help hedge against a more volatile outlook.

Precious metals miners have been the hot spot for most of the year, with the Market Vectors Gold Miners ETF (NYSE:GDX) bringing in $849 million in June. Gold miners, which have been among the worst performing assets over recent years, staged a rally on the strengthening gold prices.

Additionally, the iShares MSCI USA Minimum Volatility ETF (NYSE:USMV), which selects stocks based on variances and correlations along with other risk factors, saw $853.2 million in net inflows over June. USMV has also been among the most popular ETF options this year as investors looked for ways to keep exposure to the equities market while diminishing potential drawdowns in a volatile year.

However, in a break away from the safety theme, investors also funneled money into stock ETFs in what appears to be a bid to capture potential opportunities, or people may have thought that the Brexit hoopla was just white noise and the vote would have never passed, which would have fueled a post-vote rally.

Either way, ETF investors funneled billions into U.S., developed and emerging market equities. Over June, the Vanguard FTSE Developed Markets ETF (NYSE:VEA) saw $1.8 billion in inflows, iShares Core MSCI Emerging Markets ETF (NYSE:IEMG) attracted $1.3 billion, Vanguard FTSE Emerging Markets ETF (NYSE:VWO) added $1.3 billion, Vanguard 500 Index (NYSE:VOO) experienced $1.2 billion in inflows and iShares MSCI EAFE ETF (NYSE:EFA) brought in $619 million.

The inflows to developed market ETFs, which include a hefty Europe and Japan exposure, may have reflected investors' improved outlook on these developed economies, and the focus on non-hedged international ETFs may also suggests that traders believe the foreign currencies will continue to appreciate against the U.S. dollar, especially as the Federal Reserve is loath to hike interest rates any time soon.

ETF investors' foreign currency outlook is also relevant as the WisdomTree Europe Hedged Equity Fund (NYSE:HEDJ) and WisdomTree Japan Hedged Equity Fund (NYSE:DXJ) were among the least popular ETFs of the month, experiencing $1.3 billion and $819 million in outflows, respectively. The currency-hedged ETFs would underperform non-hedged funds when the foreign currencies appreciate against the U.S. dollar.

Meanwhile, the global zero and even negative interest rate environment may have pushed international investors into higher yielding assets, like those in the developing economies, which may have fueled the rising interest for emerging market ETFs.

The ongoing interest for VOO may be part of the ongoing shift toward low-cost, index-based strategies. VOO has a low 0.05% expense ratio, which would appeal to long-term, buy-and-hold investors. On the other hand, the SPDR S&P 500 ETF (NYSE:SPY), which has a 0.09% expense ratio and is more popular among institutional traders, experienced $4.5 billion in net outflows over June.

Additionally, the Vanguard REIT ETF (NYSE:VNQ) was a popular sector play for the month, attracting close to $1.1 billion in net inflows. The real estate investment trusts category is seen as an attractive yield-generating alternative in an ongoing low-yield environment. Moreover, REITs may continue to experience a short-term boost in the months ahead as the S&P Dow Jones Indices stated it would add an 11th sector to its Global Industry Classification Standard, creating a new Real Estate Sector from the Financial Sector. The changes to the S&P 500 index will be implemented after the close of business on September 16, 2016.

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