Money has been flowing in and out of financial markets more rapidly than ever before this year, a bullish signal as the threat of a U.S. government default fades.
About $47 billion has gone to exchange-traded funds that track everything from stocks to bonds to commodities since Sept. 1, according to data compiled by Bloomberg. That followed about $18 billion pulled in August, $40 billion added in July and $11 billion pulled in June, making it the most volatile period on record for flows. Almost $7 billion went to ETFs on Oct. 17 alone, as Congress passed legislation to avoid a default.
The unleashing of investor funds this year has coincided with the broadest U.S. stock-market rally in at least a quarter century as fresh cash helped overcome slowing profit growth and concern the Federal Reserve will cut stimulus. Resolution of the budget impasse sends an all-clear signal that will spur another round of deposits, according to David Kelly, the chief global strategist at JPMorgan Funds in New York, which oversees about $400 billion in long-term assets.
“The pattern we’d seen with flows for much of 2013 is going to resume now that things have settled down,” Kelly said by phone Oct. 17. “It’s a realization that the markets have been able to survive Washington.”
The S&P 500 rallied 2.4 percent to 1,744.50 last week, surpassing the all-time high reached Sept. 18 after Congress ended a standoff over the budget that sent the index down as much as 4.1 percent. Increasing profits and Fed stimulus have helped the gauge advance 22 percent in 2013 and 158 percent since March 2009. The index fell less than 0.1 percent to 1,743.35 at 9:41 a.m. New York time today.
The 16-day government shutdown ended on Oct. 17 after President Barack Obama signed a bill to fund the government through Jan. 15 and extend the borrowing authority through Feb. 7. About $725 million went into ETFs on Oct. 16, $6.9 billion on Oct. 17, and $2.5 billion on Oct. 18, data compiled by Bloomberg show. Oct. 17 had the biggest daily inflow in a month.
Month-to-month swings in ETF flows totaled more than $53 billion since June, about six times the 13-year average, data compiled by Bloomberg show. Fluctuations are tracked by comparing outstanding shares in the funds, which change as demand from investors rises and falls, with their prices, which are pegged to an underlying index or asset.
Funds that specialize in U.S. stocks received $12 billion in October after $14 billion last month. The SPDR S&P 500 ETF Trust had the biggest inflows at $6.7 billion last month. The iShares Russell 2000 ETF absorbed $2 billion, and the iShares MSCI Emerging Markets ETF received $4.5 billion, data compiled by Bloomberg show.
The SPDR, the largest ETF with a market cap of $158 billion, saw $14 billion come out in August after $13.8 billion was added in July. It was the biggest swing in assets since the beginning of 2008, according to data compiled by Bloomberg.
ETFs have been gaining momentum as the stock market surged. In 2013, shares of more than 450 companies have risen, the most since at least 1990, data compiled by Bloomberg show.
Assets in U.S. ETFs have almost tripled to $1.5 trillion in the last five years, according to data from the Investment Company Institute, a Washington-based trade group. About $284 billion was drained from actively managed mutual funds in the same period, data from Morningstar Inc. show. Unlike mutual funds, ETFs, the vast majority of which are pegged to indexes, can be traded throughout the day like stocks.
“There’s no doubt that ETFs have greater influence than before, and the swings in the ETFs are indicative of general market feelings,” Nick Sargen, who oversees $45 billion as chief investment officer at Fort Washington Investment Advisors in Cincinnati, said in an Oct. 16 phone interview. “They become the market.”
ETF inflows were similarly strong when the S&P 500 was peaking in October 2007. In the four months leading up to the record on Oct. 9 of that year, they attracted more than $54 billion. Money continued to go in even as the equity gauge floundered through the end of the year, with another $65 billion coming in through December, data compiled by Bloomberg show.
Now that the S&P 500’s rally since March 2009 has lasted longer than the average bull market since World War II and corporate earnings growth is slowing, investors shouldn’t expect to make the same kind of easy money, according to Eric Marshall, who oversees $1.4 billion as president and portfolio manager at Hodges Capital Management.
“The past strategies of just blindly investing in the ETFs and index funds may be a little bit more challenging,” Marshall said in a phone interview from Dallas. “You really need to go out there and find these pockets of opportunity.”
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