Over the past year, fixed income exchange traded funds have gathered about $53 billion, an indication that most investors have lost faith in the equity market. However, there are reasons to stick to the right allocation of stocks and bonds despite the fear factor.
"In the ETF space, we saw over $120 billion come into ETFs, but $53 billion of that went into fixed-income products. In the mutual fund landscape, the story is even more stark. What we saw is over a $100 billion withdrawal from equity funds, and $170 billion went into mutual funds in the fixed-income space," Paul Justice, CFA, wrote for Morningstar.
According to Thompson Reuters Lipper data, institutional investors are focusing in on safety, and trimming down holdings of U.S. domiciled equity funds, reports Daniel Bases for Reuters. When looked at in isolation, equity ETFs have had net outflows for eleven of the last fourteen weeks. SPDR S&P 500 (NYSEARCA:SPY) had the largest net outflow, at $2.9 billion in the prior week.
Morningstar analysts currently think the S&P 500 is fairly attractive on a number of valuation metrics. First, the valuation metrics valued most highly at Morningstar is the Morningstar fair value estimate, which is driven by the equity analysts who cover 465 out of the 500 stocks in the S&P 500, reports Michael Rawson, CFA, for Morningstar.
There are some attractive points that give reasons to stick around in the S&P 500. For one, divided yields from the S&P 500 are around 2.1%, which beats the 10-year bond yield of 1.8%. In reality, investors that are fleeing equities and parking their cash in a 10-year T-bond ETF are getting a lower return.
Ideally, investors should adjust their expectations. Over the next decade, a lower annual return is likely, compared to the past 25 years, says Justice. By keeping sight of the condition the market is in and allocating the right mix to stocks and bonds, there will eventually be a payoff.
According to the Morningstar Style Box, there is an obvious preference for large-cap and value stocks. In fact, large-cap value is trading at a price to fair value of around 86%, large-cap growth around 90% of fair value, adds Rawson.
A few ETFs that could make it worth staying in the equity market:
- Market Vectors Oil Services ETF (NYSEARCA:OIH)
- Industrials Select Sector SPDR ETF (NYSEARCA:XLI)
- Vanguard Information Technology (NYSEARCA:VGT)
Tisha Guerrero contributed to this article.
Disclosure: I am long SPY.
Additional disclosure: Tom Lydon's clients own SPY.