The seemingly unending growth of the ETF industry has hit a snag over the past two months, as turmoil in the U.S. stock market—the most popular area that ETFs offer exposure to—pushed investors to reallocate.
Exchange-traded funds had negative flows over the month of March, redemptions that were almost entirely due to outflows from large-capitalization U.S. equity funds. This is the second straight month of outflows for ETFs, and according to data from State Street Global Advisors, that marks the first set of back-to-back outflows since 2008, during the worst of the financial crisis.
According to FactSet, about $8.78 billion were pulled from U.S.-listed stock funds over the past month, a retreat was more than enough to offset the $3.44 billion inflows into fixed-income products.
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While some types of stock funds continued to see inflows in March, $22.1 billion was pulled from large-cap U.S. stock funds over the month, the category with the largest outflows by far. By comparison, the market segment with the second-highest outflows—European total-market funds focused on developed economies—had just $2.8 billion in outflows.
The SPDR S&P 500 ETF Trust SPY, -2.16% had outflows of $12.2 billion over the past month. The fund, which tracks the S&P 500 SPX, -2.23% is the largest ETF on the market by far, and it tends to be among the most highly traded securities of any type of any given day. As such, flows both into and out of it tend to be highly volatile as some investors use it as a short-term position or as an instrument to short the overall market.
Another S&P 500 fund, the iShares Core S&P 500 ETF IVV, -2.32% , has seen outflows of $9.8 billion over the past month. The outflows in either S&P fund were enough to turn flows negative for the entire equity category.
“The outflows reflect a reallocation of capital given what’s been going on in the market over the past several weeks. There’s a lot of headline risk, which caused the market to hit a bit of a banana peel in the final weeks of the quarter,” said Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors.
U.S. stocks fell in both February and March, pressured by a number of factors, including fears that inflation was returning to markets, central-bank policy, and the sudden prospect of a trade war between the U.S. and major trading partners. Volatility pushed both the Dow Jones Industrial Average DJIA, -1.90% and the S&P 500 into correction territory, characterized as a drop of at least 10% from a recent peak.
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Technology stocks were among the most volatile in recent weeks, but that wasn’t enough to spur an investor retreat from the sector: the Technology Select Sector SPDR ETF XLK, -2.38% had inflows of $570.5 million over the past month, despite a 6.4% drop in the price over that period.
While large-cap U.S. stock funds had outflows in March, other categories saw inflows, including small-cap U.S. stocks, a segment of the market that investors poured $2.84 billion into. That was second only to the market category of global stocks for developed markets, but which exclude the U.S. That category had $5.5 billion in inflows.
“The inflows into international and small-cap funds shows that investors were just reducing their large-cap exposure, they weren’t shying away from ETFs in general,” Bartolini said. “There continues to be a generational shift toward ETFs; even with the outflows, usage continues to go higher.”