You can never really be sure why a mutual fund or an ETF sees large inflows or outflows. Some people think it shows where the “smart money” is headed. Others think it is a contrarian indicator because there is no such thing as “smart money.” I think you have to take each situation individually and see if the moves are the result of things happening in the financial markets, the economy and the global news.
A great example is when there’s unrest in the Middle East. Everyone rushes out of stocks in that region. That’s just fear at work, because things always settle down, and the stocks rise again. Right now, for example, I’d look carefully at Israeli stocks and ETFs because when the war starts to wind down, people will move back into these stocks.
With that in mind, let’s take a closer look at ETFs that are seeing some significant inflows.
Vanguard Emerging Markets Stock Index ETF (VWO)
Vanguard Emerging Markets Stock Index ETF (VWO) is a great example of how fear controls the markets. Both in 2013 and earlier this year, emerging markets got hit with a bear run, taking many indices down around 20%. Everyone was calling for doom and wondering if the big run in emerging markets was over. VWO stock fell from around $45 to $38, and everyone was crying.
Well, since March, VWO stock has climbed back to $45. What happened? Everyone jumped back in.
Personally, this feels like a quasi-contrarian signal to me. VWO stock has been in a 5-year trading range between $36 and $52. I think you need emerging market exposure in your long-term diversified portfolio. I don’t think you can go wrong buying here and holding for a long time.
If you’re focused on a more short-term perspective, wait for another pullback, especially when everyone bails on VWO stock.
iShares US Real Estate (IYR)
iShares US Real Estate (IYR) has also seen some big inflows, which I think are institutions buying on dips. IYR stock bottomed late last year at $62, and is now just a little off its high of about $73.50.
I actually think we’re seeing a speculative residential boom, and possibly bubble, in many areas. However, IYR stock is focused on commercial real estate across many sectors. Commercial real estate is doing very well in many places, and with low interest rates, developers and REITs are able to pick up bargains at low prices with cheap debt. Some of this is also due to the weak economy, which tends to drive people to hard assets like real estate.
IYR pays a 3.57% yield and I like what I see in this sector. I think this is a long-term hold.
A similar situation exists with SPDR Dow Jones Global Real Estate (RWO), which actually holds many of the same REITs as IYR stock does. RWO stock is more globally diversified, and many of the private equity folks I talk to are loving the cheap real estate they are finding abroad.
The chart for RWO stock looks almost the same as IYR stock, and it might even be the better choice, although its yield is only 3.03%.
iShares US Healthcare (IYH)
The iShares US Healthcare (IYH) ETF has been seeing inflows, and I suspect this is a move into what people perceive as a safe haven.
I think people are starting to realize that healthcare companies will actually do well under Obamacare because the suspicion is demand for healthcare services will be greater, and they will get paid for. IYH also contains a lot of standard big-cap, low-dividend-paying names like Johnson & Johnson (JNJ), so this is likely a move into “safe” stocks.
The chart is a nice upward ride with few downdrafts over the past several years. It lacks the volatility of real estate, and I think you want to follow the money in this case.
Lawrence Meyers does not own shares in any company mentioned.