The three best-selling exchange traded funds (ETFs) so far this year have been Treasury trackers. Two of the three worst sellers have been followers of the S&P 500.
Is it time to start talking of another great rotation? Almost certainly not. But the latest flow data emphasise that the excitable chatter about one at the start of last year was extremely premature.
In February, £11.8 billion – a record number for a single month – entered fixed income ETFs, according to BlackRock. Of this, £6.9 billion went into US Treasury products and just £842 million into high-yield bonds.
The one constant from last year was an interest in short duration, which won £4.4 billion of the total flows.
Delving into BlackRock’s data underlines the extent to which markets still hinge on central banks. Between the beginning of February and the testimony given to Congress by Federal Reserve chair Janet Yellen just 11 days later, a staggering £12.7 billion was pulled out of equity ETFs – the majority exiting S&P 500 trackers. Fixed income ETFs swelled by £10.1 billion.
But then through the remainder of the month equity ETFs regained £16.3 billion; fixed income garnered £1.7 billion.
Including January’s flows, fixed income ETFs are now £13.9 billion ahead for the year. That is almost as much as the total of £16.3 billion for the whole of 2014.
Yet unlike that period – when the money poured into short duration masked net redemptions from all other maturities – so far this year, all areas of fixed income ETFs have enjoyed positive flows.
Michael Howell, managing director of CrossBorder Capital, has argued that this should not be surprising.
The tapering of quantitative easing is taking liquidity out of the financial system, which is beneficial for fixed income, while dwindling risk appetites after the recent undiscriminating equity rally and early earnings disappointments around the world are encouraging many to take profits.
‘Don’t chuck out bonds,’ Howell advised. ‘They are not as bad as many people have been making out.’
ETF investors also seem to be siding with Howell on his continued scepticism over emerging markets. For him, the problems will emanate from China, where he observes that liquidity has jumped 400% since 2006, while liquidity in the rest of the world has risen by just 80% through the same period.
‘That is very scary because it is coming to an end,’ Howell said. ‘China is turning off the tap.’
The ETF community has duly taken fright and flight. February witnessed emerging market outflows of £2.7 billion, taking the year-to-date exodus to £7.9 billion. That is already more than the £6.2 billion that was withdrawn from emerging market ETFs through all of last year.