Getty Images As financial markets convulsed lower over the past week, flows into and out of exchange-traded funds help shed a light on what investors are thinking.
“This has become a hide-under-the-mattresses environment,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “Investors are using the benefits of liquidity and commission-free trading that ETFs offer as a safe haven. The safest of assets, U.S. Treasuries, is garnering strong interest.”
CFRA data for the bumpy past week show that it’s not just any Treasurys investors are snatching up. Rather, they’re prioritizing shorter-term paper. The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF BIL, -0.01% was the second-biggest gainer, behind only that most liquid of institutional investor tools, the S&P 500 ETF Trust SPY, +4.96% . BIL picked up $4.4 billion over the week ending Monday. In fact, five of the 10 funds with the biggest inflows had short-term government bond strategies.
| ETF name, ticker | Category | Flows |
| SPDR S&P 500 ETF Trust US:SPY | US Equities – Broad Market & Size | 9,268,802,650 |
| SPDR Bloomberg Barclays 1-3 Month T-Bill US:BIL | Bonds – Treasury & Government | 4,400,779,710 |
| Vanguard S&P 500 VOO, +5.23% | US Equities – Broad Market & Size | 3,701,374,532 |
| iShares Short Treasury Bond SHV, +0.04% | Bonds – Treasury & Government | 3,149,169,100 |
| iShares 1-3 Year Treasury Bond SHY, -0.06% | Bonds – Treasury & Government | 3,093,335,970 |
| Vanguard Total Stock Market VTI, +3.73% | US Equities – Broad Market & Size | 1,344,854,466 |
| SPDR Portfolio Short Term Treasury SPTS, -0.18% | Bonds – Treasury & Government | 1,332,686,290 |
| iShares Russell 2000 IWM, +3.87% | US Equities – Broad Market & Size | 680,986,900 |
| iShares 3-7 Year Treasury Bond IEI, -0.54% | Bonds – Treasury & Government | 670,629,100 |
| United States Oil Fund LP USO, -3.72% | Commodities & Metals – Energy | 651,371,000 |
| Source: CFRA | ||
But some big bond funds were also among the biggest losers over the past week. About $3.1 billion flowed out of the iShares Core U.S. Aggregate Bond ETF AGG, -1.03%, and the iShares U.S. Treasury Bond Fund lost $1.5 billion.
Investors also fled emerging markets funds. “Emerging market ETFs are highly exposed to sentiment for global economic growth, and the pandemic has negatively impacted demand,” Rosenbluth noted. “They also have high exposure to China, where the coronavirus first had an impact.”
| ETF name, ticker | Category | Flows, $ |
| iShares Core U.S. Aggregate Bond US:AGG | Bonds – Broad Market | -3,133,898,300 |
| iShares TIPS Bond TIP, +0.01% | Bonds – Inflation protected | -1,744,907,000 |
| SPDR Gold Shares GLD, +1.87% | Commodities & Metals – Gold / Metals | -1,719,930,000 |
| Financial Select Sector SPDR Fund XLF, +4.27% | US Equities – Industry Sector | -1,576,657,235 |
| iShares MSCI Emerging Markets EEM, +6.26% | Global or ExUS Equities – Broad / Regional | -1,554,861,015 |
| iShares U.S. Treasury Bond GOVT, -0.77% | Bonds – Treasury & Government | -1,459,156,090 |
| iShares MBS MBB, +0.17% | Bonds – Mortgage | -1,298,951,100 |
| iShares JP Morgan USD Emerging Markets Bond EMB, +0.65% | Bonds – Treasury & Government | -1,214,539,680 |
| Vanguard Intermediate-Term Corporate Bond VCIT, -1.44% | Bonds – Corporate | -1,073,667,000 |
| Vanguard Total Bond Market BND, -0.93% | Bonds – Broad Market | -1,055,876,000 |
| Source: CFRA | ||
For Rosenbluth and other ETF insiders, the volatility of the past week has been a vindication. Market commentators have spent the past several years warning of the potential dangers lurking in passively-managed funds. If investors flee for the exits all at once, the doors could get blocked, the thinking has gone — and the all-day tradeability of ETFs just amplifies that concern.
See: ETFs make the bond market safer, bank analysts say. No kidding, says the ETF industry
In fact, last Thursday, fixed-income ETFs collectively traded $51 billion, more than four times their average daily volume, according to iShares. But the worst that happened was more innocuous. As MarketWatch has reported, investors in ETFs should be aware that the trading price of any given fund may occasionally become slightly disconnected from the trading values of the securities within.
That’s exactly what happened last Thursday to the big investment-grade corporate-bond fund iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, -2.19% , which closed about 5% lower than the stated value of its holdings. That means anyone who tried to sell LQD on Thursday received about 95% of what they might have expected.
As previously reported, one way to avoid an outcome like this is to trade ETFs using limit orders, which allow the investor to specify the values at which they want their trades to be executed. By Friday, though, that differential had shrunk to a fraction of the Thursday gap, Rosenbluth noted.
Read: Here’s the right way to trade ETFs
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