Market selloffs usually create fear and overreaction as investors digest the news, then reposition their assets to weather the storm. Despite the good intentions of buying low and selling high, traders’ tend to protect profits and preserve capital whenever possible.
That might be one reason why we have seen such as overreaction in the SPDR S&P 500 ETF (SPY) during this most recent bout of summer volatility.
During the past two weeks, the SPY ETF fell 3.84% from high to low on a closing basis, but it has since recovered about 40% of that modest drop. And yet … investors have been selling SPY in droves.
According to data from ETF.com, the SPY ETF saw net outflows of more than 10 billion from Aug. 5-11, easily placing it in the top of all ETF distributions during that time frame. Also, this single week of selling nearly doubled the total redemptions in SPY to $21 billion this year alone — that represents a roughly 12% reduction in assets year-to-date for this bellwether ETF.
It’s worth noting that similar index funds such as the Vanguard S&P 500 ETF (VOO) and the iShares Core S&P 500 ETF (IVV) still are experiencing net inflows so far this year. VOO has increased its asset base by $4.5 billion, while IVV has gained $3.6 billion.
These ETFs have modestly smaller expense ratios than SPY, but track the same 500 large-cap stocks. Both competing funds also have the advantage of being offered commission free at a variety of major brokerages as well.
What’s Driving the Selling in the SPY ETF?
One aspect that might be exacerbating this effect is the length of time the market has gone without a typical 10% correction and remained above its 200-day moving average. It has been years since either even occurred, which might be creating itchy fingers on the sell button by those trying to time the next bearish cycle.
In addition, this bifurcation in asset flows among similar funds might signal that the SPY ETF has become more of a trading vehicle than a long-term holding because of its history, liquidity and notoriety. The three-month average daily trading volume on SPY is 87 million shares, which translates to a notional value of nearly $17 billion exchanging hands every trading session. This type of liquidity is particularly important for institutional traders and hedge funds that need to get in and out of the market with size and speed.
On the flip side, the assets flowing into VOO and IVV might be earmarked for long-term investing themes. That’s not to say we wouldn’t see funds flow from these ETFs in a steep selloff, but the evidence seems to support bigger fluctuations of buying and selling in SPY.
It’s also worth noting that Vanguard equity ETFs represent five of the top 10 funds for inflows so far this year. Both retail investors and advisers are continuing to embrace low-cost indices with built in incentives such as waiving trading fees to build core positions in their portfolios.
Despite these recent outflows and over reaction to the selloff, I believe that SPY ETF will retain its crown as the world’s largest and most liquid funds for years to come.
If the market resumes its uptrend, this cash will likely be put back to work in other sectors or focused opportunities. The Energy SPDR (XLE) and Health Care SPDR (XLV) are the reigning sector leaders in new inflows this year and may continue to attract new assets moving forward as well.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. To get more investor insights from FMD Capital, visit their blog.
