Stick and Move

US-Listed ETF Flash Flows Stick and Move By Matthew Bartolini, CFA® But that hasn’t stopped volatility counterpunches. As June Head of SPDR Americas Research came to a close, multiple G10 policy makers indicated that State Street Global Advisors monetary policies may need to be tightened. As a result, rates, which had been trending lower, reversed course and edged higher. Value trumped growth, and Eurozone stocks fell as investors were fearful that the ECB was taking away the easy money punch bowl just as the party was getting Known as the sweet science, boxing is more about strategy started. than brute strength. Muhammad Ali wasn’t the hardest puncher, but his footwork, agility, and ability to land a These ‘hawkish’ jabs led to a spike in volatility in both stocks dizzying jab at will made him the greatest of all time. Stick and bonds, curtailing certain first half trades that had worked and move. That is an essential tool for any boxer. Stick the well. And that is the problem with solely relying on the stick jab then move left, right, back or forward seeking to stick and move. If you do it too long, exhaustion sets in and the again before your opponent can steady themselves. stick doesn’t sting as it once did. Opponents may be able to catch you flat footed and land an upper cut or right hook. Just With so many rotations throughout 2017 the market has tell that to tech stocks which have been up nearly 20 percent been sticking and moving all year. But unlike a boxer with a year-to-date by mid-June, only to see the momentum signal strong jab, the market has been throwing a lot of fade and have their bell rung in the sixth round of this twelve combinations on the way to a broad based rally that has seen round fight. global stocks and bonds rising in tandem. And the combinations thrown have been artful; value then growth, US Don’t get me wrong, the stick and move has worked in 2017. then Europe, rising rates then falling rates, high yield then However, coordinated policy tightening or a misstep by investment grade. With such frenetic combos thrown, it’s Congress may be the ‘puncher' that lands one, and sends the not a surprise that momentum is the best performing factor market to a knee. Remember, for every Mike Tyson there’s a year to date. Stick, and then move to the next best thing. Buster Douglas. For every Apollo there is a Rocky. Sugar Ray Leonard would be in awe of the way that the market has changed speeds and picked its spots. At a time when valuations in the US are elevated and global growth, while improving, is not thumping along, investors The by-product of all of this sticking and moving is that may be wise to do less sticking and moving, but more volatility has been constrained. When you can land every bobbing and weaving in the later rounds of 2017. The best punch, why worry? However, while cross-asset volatility has offense is a good defense. After all, when Ali couldn’t been pushed to noticeable lows, investors should not outpunch his opponent anymore he ‘Rope a Doped’ them. misconstrue this environment as immune to uncertainty or The ‘Rope a Dope’ equivalent for portfolios is diversification risk, as volatility has been able to sneak a swipe in during the and dry powder so when opportunities present themselves year. Political gridlock, Washington scandals, and geopolitical combinations can be thrown with maximum impact. tensions have rocked sentiment at times, but the impact was limited as the market was able to parry any follow up blow. Market Performance Rolling Rolling Market Index June YTD 90 Days 1 Year US S&P 500 Index 0.5% 8.2% 2.9% 15.2% Small Cap Russell 2000 Index 3.3% 4.3% 3.7% 22.4% EAFE MSCI EAFE Index -0.4% 11.8% 5.8% 16.2% EM MSCI Emerging Markets Index 0.5% 17.2% 5.1% 20.4% Aggregate Bonds Bloomberg Barclays US Aggregate Bond Index -0.1% 2.3% 1.3% -0.5% High Yield Bloomberg USD High Yield Corporate Bond Index 0.0% 5.1% 1.7% 12.1% Broad Commodity Bloomberg Commodity Index -0.3% -5.6% -3.8% -7.9% Volatility CBOE SPX Volatility Index (VIX) 7.4% -20.4% -13.1% -24.3% US Dollar Bloomberg Dollar Spot -1.2% -6.6% -3.8% 0.1% Source: Bloomberg Finance L.P., as of June 30, 2017 Past performance is not a guarantee of future results. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect the price return, and do not reflect all the reinvestment of dividends and other income. Performance returns for periods of less than 1 year are not annualized. Stick and Move Fixed Income is the Pound for Pound King Through the first six months of 2017, US-listed ETFs have Part of this has to do with the gravitational pull towards ETFs amassed more than $245 billion of inflows. This marks the by investors seeking low cost, efficient beta exposures to best start to a year ever. What is even more eye-popping is manage duration or seek income opportunities against a low that the first half of 2017 not only ranks number one in terms and oscillating rate environment. The other part is seeking to dollar flow totals, but also for flow totals as a percentage of add ballast to portfolios in case of equity drawdowns or start of year assets, based on data going back to 2008. geopolitical tail risks. No matter the case, with such eye- popping flow totals the takeaway is that it’s part market, and The one-quarter of a trillion dollars deposited into ETFs this part generational, and 2017 has been the year of bond ETF. year equates to almost 10 percent of the assets under management at the start of 2017. The previous highest But that doesn’t mean equities are a forgotten bunch. The percentage gain occurred in 2012, when ETFs took in 7 $172 billion of inflows this year represent 50% of the prior percent of start of year assets through the first six months of twelve month haul. A staggering feat considering that at this that year. point last year, equity funds flows were negative through the first half of 2016! After setting a new record in 2016, when fixed income fund flows almost topped $100 billion for the first time, bond So, while fixed income flows are the Cinderella story, equities funds have showed no desire to slow down. Through the first have played their part in sending the ETF assets to all-time six months of 2017, fixed income flows are at $70 billion, and highs and new records. are on a pace to shatter all records as if they were Mike Tyson in the late eighties. Figure 1: Asset Class Flows Prior Month ($M) Trailing 6 Month ($M) Year to Date ($M) Trailing 12 Month ($M) Equity 31,363 172,004 172,004 355,082 Fixed Income 13,687 70,719 70,719 115,899 Commodity 1,471 2,075 2,075 -3,240 Mixed Allocation 156 388 388 1,348 Alternative 19 -70 -70 92 Specialty 165 313 313 120 Top two and bottom two categories per period are highlighted. Source: Bloomberg Finance L.P., State Street Global Advisors, as of June 30, 2017 International Made Great Again Investors made use of their passports in 2017, much more so Even currency hedged ETFs, a segment which has been than in the past years. Through the first six months of the somewhat under pressure as the dollar has sunk 6.44 percent year, investors have poured more than $80 billion into funds this year, were able to get in on the action with almost $2 that provide exposure to stocks outside the US. A figure that billion of inflows year to date. represents the best start to a year ever for international funds, and with over $20 billion deposited in June alone, it But like any other stick and move type activity, investors were also caps off the segment’s best back-to-back quarterly able to land some punches in the US too. While international performance ever. flows have bested the US in 2017, America has the lead over the last twelve months, a time frame that encapsulates the The shift overseas was broad based, as emerging market fund significant level of exuberance felt post-election – a level of flows topped $10 billion for the second quarter in a row, and sentiment which continues to be affected by every tweet or are also off to their best first half figure on record. policy delay. Figure 2: Equity Geographical Flows Prior Month ($M) Trailing 6 Month ($M) Year to Date ($M) Trailing 12 Month ($M) U.S. 10,137 76,719 76,719 234,734 Global 634 5,411 5,411 12,866 Currency Hedged 416 1,846 1,846 -6,935 International - Broad 14,194 68,864 68,864 101,071 International - Region 4,290 15,243 15,243 9,676 International - Single Country 1,691 3,923 3,923 3,671 Top two and bottom two categories per period are highlighted. Source: Bloomberg Finance L.P., State Street Global Advisors, as of June 30, 2017 State Street Global Advisors 2 Stick and Move Chasing the Big Mo In taking a deeper look at sector flows, I think I saw better That is the issue with chasing the ‘Big Mo’ without a defense played by the Atlanta Falcons in the second half of fundamental backdrop.

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