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What the ETF Money Flow is Showing Us

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Thursday, November 5, 2015
Money and Markets
The ETF Money Flow Highlights
Potentially Profitable Trends
by Mike Burnick

Dear ,

Last month, stocks shrugged off plenty of pessimistic data and profit reports to surge higher — with the S&P 500 Index climbing 8.3% in October — the best monthly gain in four years.

That's a stunning reversal of fortune considering the dismal economy and depressing corporate results this quarter.

In fact, third-quarter GDP shows the U.S. economy slowing to a crawl, growing at a yearly pace of just 1.5% — less than half the growth of the previous quarter. Corporate profit reports have been equally demoralizing with 53% of stocks in the S&P 1500 Index reporting top-line sales that missed estimates. S&P profits are on track to fall more than 2% year over year, the second straight quarterly decline in earnings, which is a major red flag for me.

Still, you would never know it by the way stocks zoomed higher last month and new highs are now in sight. In fact, the S&P 500 is just 35 points away from its May peak! So, which stocks and sectors are investors flocking to, driving the market higher? The answer is twofold:

1. The return of an old familiar theme, and

2. Major reversals of fortune for the market's biggest winners and losers.

I like to take a close look at ETF money flows on a monthly basis for evidence of new buying and selling trends. Because low-cost ETFs have grown so popular among investors, they're a pretty good proxy for overall capital flows in global financial markets.

And here's an interesting trend that re-emerged last month after being dormant in August and September: Global capital flows into U.S. stocks and out of International stocks.

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Dr. Martin Weiss has highlighted this theme many times in the past year: the global tsunami of money flowing out of troubled economies in Europe, the Middle East and elsewhere, and seeking out safe-haven investments in higher quality U.S. assets.

Well, this theme played out in spades again last month with U.S. stock and bond ETFs attracting over $20 billion in fresh capital during October according to Bloomberg data.

Some $10.7 billion in capital flowed into U.S. equity ETFs last month alone. That's a sharp acceleration in money flows to domestic stocks, up from the $6 billion of total inflows so far in 2015 through the end of September.

But it's not just stocks that investors have a renewed appetite for: U.S. corporate bond ETFs enjoyed inflows of $8.3 billion in October — the biggest single-month of money flow ever recorded.

Most of that cash was attracted to the riskiest bonds, which also offer the highest yields in a world of near-zero interest rates. SPDR Barclays High Yield Bond ETF (JNK) attracted $2.7 billion in assets — the most of any ETF last month — while iShares iBoxx High Yield Corp. Bond ETF (HYG) took in another $5.6 billion in assets.

That's a big shift in investor sentiment from risk-off in August and September, to a big time risk-on bet again last month.

Click image for larger view

In terms of stock market sectors, ETFs tracking consumer staples, technology and real estate had inflows of over $1 billion each last month. Tech and staples have been consistently strong performing sectors over the past 12 months, up 11.2% and 9.4%, respectively, and it looks like that trend is continuing into November.

In a stunning reversal of fortune, investors yanked $1.2 billion out of health-care ETFs, that's after record inflows of $9.1 billion through the end of September. iShares Nasdaq Biotechnology ETF (IBB) accounted for $514 million of the outflow.

You can chock up this asset allocation U-turn to recent comments from presidential candidates about regulating pharmaceutical prices.

Internationally, Germany was one of the biggest losers with investors pulling $600 million out of ETFs that invest in Europe's largest economy. iShares MSCI Germany ETF (EWG) suffered $354 million of those withdrawals.

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Perhaps it's no coincidence the euro currency was also sliding lower against the dollar last month. But investors also sold $191 billion worth of the iShares Currency Hedged MSCI Germany ETF (HEWG) in October. So this may be more of a vote of no-confidence in Europe's anemic economies.

And it looks like European capital outflows are bound for U.S. stocks again.

And there was a positive reversal-of-fortune in favor of Emerging Markets in the ETF flow show last month.

After 12 months of steady outflows to the tune of $7.2 billion in withdrawals, emerging market equity ETFs attracted $1.6 billion in fresh capital last month. This could be just the start of a key reversal that reinforces the risk-on theme in financial markets since the beginning of October.

There are several asset allocation trends to keep a watchful eye on here:

#1: U.S. assets, both stocks and bonds, are once again seen as the best game in town for investors in a world where deflation still has the upper hand and growth is hard to come by, and

#2: Emerging-market ETFs and stocks could emerge as big winners if the money-flow trend persists because these stock markets are among the cheapest in the world, making them even more attractive.

The iShares MSCI Emerging Market ETF (EEM) trades at a Price/Earnings (P/E) ratio of just 11, compared with a P/E ratio of 18 for the SPDR S&P 500 ETF (SPY). That's a very compelling discount for markets that are growing much faster than the U.S.

Good investing,

Mike Burnick

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The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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