The migration of cash from more expensive mutual funds to ETFs might sometimes be exacerbated on down days for the stock market, as investors take their profits.
When stocks fall, investors typically pull money out of the market. But when U.S. equities suffered a big two-day slump last month, some traders didn’t blink an eye.
Exchange-traded funds took in $78.5 billion in January, nearly 30 percent over the previous monthly record. ETFs saw close to $4 billion a day in inflows even on the stock market’s down days, said Eric Balchunas, a Bloomberg Intelligence analyst, who cited the example of the index-tracking SPDR S&P 500 ETF Trust (SPY).
“This is unusual, especially for the highly liquid ETFs such as SPY, where flows usually correlate to the market,” Balchunas said. He identified two reasons for the divergence: “First, the low ETF volume during the sell-off foreshadowed that it wasn’t that much of a panic situation and would be a ‘buy the dip’ type of sell-off. Second, many investors may have used it as an excuse to move out of their mutual funds into an ETF.”
The migration of cash from more expensive mutual funds to ETFs might sometimes be exacerbated on down days, as investors take their profits. To Balchunas, it’s a sign of what could happen should this bull market sour. “This provides a window into the seismic shift into ETFs that could occur in the next bear market, when investors who are currently ‘locked in’ to active mutual funds via their unrealized gains can finally leave for the cheaper, more tax-efficient ETF structure,” he said.