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SAN ANSELMO, CA – AUGUST 29: In this Photo Illustration, Twenty dollar bills sit in a wallet on August 29, 2017 in San Anselmo, California. The dollar fell to a two and a half year low to 91.77 Tuesday following the latest missile launch by North Korea. The U.S. dollar index has slipped over 10% since the inauguration of U.S. President Donald Trump. (Photo Illustration by Justin Sullivan/Getty Images)
Justin Sullivan/Getty Images
Investors made some changes to their fixed-income holdings and turned to some old favorites, suggesting a long-awaited rotation toward undervalued stocks might finally be at hand, according to October exchange-traded fund flow data.
A report from CFRA’s First Bridge database showed eight fixed-income funds among the top 20 funds in terms of inflows, continuing a trend that’s lasted for more than a year. The top 20 are shown in the table below.
Perhaps more telling than the funds that gathered inflows, however, was one that hemorrhaged money. The iShares iBoxx $ High Yield Corporate Bond ETF HYG, +0.44%, a $24-billion behemoth that’s benefitted from the Federal Reserve’s ETF-buying spree in the wake of the March market meltdown, lost over $2.1 billion last month.
Investors aren’t pulling away from fixed income, said Todd Rosenbluth, CFRA’s head of mutual fund and ETF research: money going into fixed-income funds accounted for 60% of inflows for the month, but they are seeking different exposures.
As the U.S. presidential election drew closer and the number of coronavirus cases spiked globally, investor tolerance for risk waned, Rosenbluth noted. That meant pulling lots of money out of one of the biggest junk bond ETFs, and in a surprising move, putting $1.5 billion into an ETF that tracks mortgage-backed securities.
“That was not a one for one trade,” Rosenbluth said in an interview. But it’s notable: “As we head into what should be increased volatility with the election, it gives me comfort that investors will have places to move to if they become more nervous about the outcome or lack of clarity that this week brings.”
Mortgage-backed securities are probably better seen as an alternative to Treasury bonds than high-yield corporates, he noted. They offer a bit more risk — but still the safety of a quasi-governmental exposure — and a bit more yield than government bonds TMUBMUSD10Y, 0.881%.
| October exchange-traded fund inflows | |
| Vanguard Total Stock Market ETF VTI, +1.83% | $3.77 billion |
| Vanguard Total International Stock ETF VXUS, +1.72% | 2.59 billion |
| Vanguard Total Bond Market ETF BND, -0.03% | 1.98 billion |
| iShares ESG MSCI USA ETF ESGU, +1.75% | 1.96 billion |
| iShares MBS ETF MBB, -0.00% | 1.49 billion |
| Vanguard Total International Bond ETF BNDX, -0.04% | 1.45 billion |
| Vanguard Short-Term Corporate Bond ETF VCSH, +0.00% | 1.38 billion |
| iShares Russell 2000 ETF IWM, +2.62% | 1.36 billion |
| iShares iBoxx $ Invstmnt Grade Corporate Bond ETF LQD, +0.08% | 1.24 billion |
| iShares Core U.S. Aggregate Bond ETF AGG, -0.05% | 1.18 billion |
| iShares JP Morgan USD Emerging Markets Bond ETF EMB, +0.66% | 1.07 billion |
| JPMorgan BetaBuilders US Mid Cap Equity ETF BBMC, +1.45% | 1.03 billion |
| ARK Innovation ETF ARKK, +2.46% | 1 billion |
| iShares 20+ Year Treasury Bond ETF TLT, -0.46% | 981 million |
| SPDR S&P Dividend ETF SDY, +1.52% | 966 million |
| iShares ESG MSCI EM ETF ESGE, +0.10% | 929 million |
| iShares Core S&P 500 ETF IVV, +1.68% | 859 million |
| Invesco S&P 500 Equal Weight ETF RSP, +1.92% | 788 million |
| Energy Select Sector SPDR Fund XLE, -0.60% | 730 million |
| Financial Select Sector SPDR Fund XLF, +2.42% | 695 million |
Also of note in October were the two funds that barely made it into the top 20, the Energy Select Sector SPDR and the Financial Select Sector SPDR. For all the changes 2020 has brought to daily lives and financial markets, “this is not the first time and it won’t be the last time investors use financials as a value-oriented strategy,” Rosenbluth said.
Is the “value rotation” — a shift to lower-priced securities that will do better at the beginning of a new business cycle — for real this time, after multiple head-fakes? “There’s an inevitable rotation that should take place when the market has rallied as high as it has,” Rosenbluth said.
See: The Fed has bought $8.7 billion worth of ETFs. Here are the details
