If you track various metrics to determine overall market health, don’t overlook fund flows. According to Morningstar, “Fund flows, also referred to as asset flows or just ‘flows,’ measure the net movement of cash into and out of investment vehicles like mutual funds and exchange-traded funds.”
Fund flows are important because they give you a glimpse of how and where institutional investors (who buy and sell in huge volume) are moving money. They can also clue you in to investor sentiment regarding the broader market, or specific sectors, regions or market caps.
For example, if institutions are buying into one particular equity asset class, such as large-cap domestic stocks, you’ll see those fund flows drive prices higher in an index such as the S&P 500.
But funds, just like the tide, ebb and flow. If money is going into the S&P 500, as it was between April 2020 and August 2021, before taking a breather, other asset classes are either declining, holding steady, or not rising as much.
But let’s drill down a bit, using two S&P index ETFs to illustrate yearly fund flows.
What Fund Flows Can Reveal
In 2020, the SPDR S&P 500 ETF Trust (SPY) ETF advanced 18.22%. Meanwhile, the Vanguard S&P Small-Cap 600 ETF (VIOO) advanced 11.43%.
Now, there’s no way anybody would characterize either of those returns as poor, especially considering how it seemed the year would go if you teleport yourself back to March 2020.
But those returns point out the differences between two equity asset classes, U.S. large caps and U.S. small caps. Both did well last year, but one did better. More money was going into domestic large caps, mostly in the form of the big techs that dominate the S&P 500.
So where are we now, as markets are wobbling, supply-chain and labor issues threaten economic growth, and there’s anxiety about the U.S. Senate’s ability to reach an agreement to avoid a debt default?
For the week between October 1 and October 7, domestic ETFs reeled in $4.3 billion. Year-to-date, U.S. ETFs have brought in $652.3 billion in assets, for a total of $6.64 trillion in assets under management, according to ETF.com
When slicing and dicing the inflows, here are some quick stats for last week, according to ETF.com:
- International equity ETFs were the winners, with a net inflow of $2.8 billion
- U.S. equities brought in $557.8 million
What to Look for Now
Here are some things to watch for:
- Asset class performance: It’s difficult to simply compare two funds and use that as a proxy for broader flows. However, when you are looking more broadly at asset class inflows, that can tip you off as to your own allocation, and whether it’s aligned with institutional investors’ sentiment. In practice, that means to track broad asset class performance rather than just comparing two funds, which may lead your conclusions astray.
- Fixed income: Fund flows into bonds can clue you into sentiment regarding the equity markets. For instance, net flows into U.S. fixed-income funds held up better than equities during the 2020 correction. As equities went back into rally mode in April, fixed-income once again lagged.
- Popular funds: Fund flows can show you which securities investors are piling into – or out of. That can be helpful if you are allocating a portfolio using ETFs. If you are looking for a specific asset class, there are generally several ETFs or mutual funds that would fit the bill. It’s true that factors like cost should play a role in fund selection, but if you notice that one asset-class fund is pulling in more money than another, that’s a signal that one with more inflows may be more likely to rise in price over time.
It’s important not to focus too much on fund flows too far in the past, as that’s essentially irrelevant. Instead, look to the recent past. Institutional investors often make their buys slowly, over time, so it’s wise to review fund and asset class inflows for the past several months, or a year at the most. That still gives you plenty of insight that you can apply to your own investing.
You can use fund flow data to understand either the top-down or bottom-up picture of how institutions are investing their money. By studying the flows of either broad asset classes or specific funds, you can fine-tune your investment strategy.
The idea is not to trade in and out willy-nilly based on weekly fund flows. Instead, the trajectory of institutional money can help you adjust portfolio weightings or add alpha, all within the parameters of your established financial plan.