Scores of analysts look to derive meaning from fund flows. Specifically, if more investors are buying a particular ETF, it may be a sign that momentum is building. (It may also be a sign that the herd is moving in a direction that you shouldn’t be.)
By the same token, when investors start to withdraw or sell certain holdings, it may be indicative of an ETF losing favor. Perhaps investors are rotating away from a given economic segment, country or asset class. Similarly, some folks may be taking profits.
At first glance, one might look at the data below, and assume that investors are cooling to the idea of gold going through the proverbial roof. Or, they may be tiring of the B in the BRIC emerging market story.
| 3 Of The Largest ETF Outflows in July 2009 (In Dollars) | |||||||
| $ Millions | Approx % Decrease | ||||||
| iShares MSCI Brazil (EWZ) | -$514 | -5.9% | |||||
| Direxion Daily Financial Bull 3x (FAS) | -$984 | -57.2% | |||||
| SPDR Gold Shares (GLD) | -$1,517 | -4.4% | |||||
However, I think that idea merits further examination. For one thing, the percentage outflows are not nearly as staggering as the dollar amounts might initially suggest. And in the case of gold, often viewed as an ultimate safe haven against financial collapse, there may be a bit more willingness to look at the global credit situation as having vastly improved.
Yet the idea that Brazil is suddenly out of favor ignores a different reality; that is, $60 million poured in the Brazil Small Cap Fund (BRF), representing a 120% jump in assets under management. Simply put, some investors (less than 6% in representative dollar value) may be taking profits where they have large materials/energy exposure. However, the interest in accessing massive middle class buying power in places like Brazil and China are evident in greater inflows into small-cap funds like BRF and HAO.
In contrast, the move away from Direxion Daily 3x Financial Bull (FAS) as well as ProShares Ultra Financials (UYG) is far more indicative of a sentiment shift. With nearly 60% of FAS assets being “cashed in,” a great many people may feel that the extraordinary recovery in banking and financial services is slowing.
Granted, some of the redemptions here may be directly attributable to proposed changes to the regulation and sales of leveraged/inverse products. At the same time, there has to be some feeling that banks still hold toxic assets and that their lending activity has been subdued. Ergo, the “long financials play” may have run its course.
Again, FINRA’s hard look into leveraged ETFs may have scared off a number of investors from leveraged ETF investing… but not all of them. One look at the volume of shares trading hands on the Direxion Daily 3x Financial Bear (FAZ) shows that tens of millions of shares are trading hands each session. Indeed, financial stocks are still a volatile place to be.
Direxion 3X Financial Bear Increasing Volume
Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.
