Using the SPDR S&P 500 ETF (NYSEARCA:SPY) as the gauge, the market put in its novel coronavirus bottom on March 23. Since then, the rally has been furious, sparking renewed interest in a slew of the most popular exchange-traded funds. What’s interesting about this rebound, at least in terms of flows into and out of ETFs, is that many of the most bought ETFs over the past two months aren’t even equity-based funds.
Conversely, eight of the 10 worst ETFs since March 24, as measured by outflows, are equity funds. The caveat there is that investors remain largely devoted to domestic stocks as four of those eight outflow offenders are international equity ETFs.
The most popular ETFs since March 24 fall into different categories, primarily Federal Reserve assistance, weak dollar capitalization, thriving sectors and some surprises:
- iShares iBoxx Investment Grade Corporate Bond ETF (NYSEARCA:LQD)
- SPDR Gold Shares (NYSEARCA:GLD)
- iShares High Yield Bond ETF (NYSEARCA:HYG)
- Invesco QQQ ETF (NASDAQ:QQQ)
- Health Care Select Sector SPDR (NYSEARCA:XLV)
- U.S. Oil Fund (NYSEARCA:USO)
- iShares ESG MSCI USA ETF (NASDAQ:ESGU)
With that in mind, let’s take a look at why each of these is among the most bought ETFs in 2020 so far.
Most Bought ETFs: iShares iBoxx Investment Grade Corporate Bond ETF (LQD)
Expense Ratio: 0.15%, or $15 annually per $10,000 invested
Since March 24, the iShares iBoxx Investment Grade Corporate Bond ETF is the king of the most popular ETFs, having hauled in $13.01 billion in new assets. But, as is the case with some of the other funds highlighted, LQD earns a big asterisk in the form of Federal Reserve assistance.
In addition to the Fed buying LQD and some other corporate bond ETFs, the iShares fund benefited from front-running, or traders buying the biggest investment-grade corporate debt ETF before the Fed did. The flows have been meaningful as LQD now has nearly $49 billion in assets under management, a hefty percentage of which arrived over the past 60 days.
LQD has a 30-day SEC yield of 2.63% and an effective duration 9.37 year. The fund holds over 2,200 bonds, more than 88% of which are rated A or BBB.
SPDR Gold Shares (GLD)
Expense Ratio: 0.40% per year
The SPDR Gold Shares is another prime example of an ETF getting some from the Fed and other central banks. Depressed Treasury yields and a spate of dividend cuts among common stocks are boosting the allure of no-yield gold. Then there’s the risk-off environment that permeated much of the first quarter, debased foreign currencies and rampant bullion buying by central banks outside the U.S.
Another point to consider as gold rallies is that jewelry demand in crucial markets, such as China and India, is waning due to Covid-19. History shows that’s actually a positive for investment demand, which is now largely driven by ETFs, like GLD.
“But gold demand history illustrates an unusual compensatory mechanism, in that during periods when jewelry demand drops dramatically there is often a significant pickup in demand for investment, as investors seek the benefits of gold’s status as a safe-haven asset,” according to State Street. “And so it proved during the opening three months of 2020, when the demand for gold as an investment soared a full 80%.”
iShares iBoxx High Yield Corporate Bond ETF (HYG)
Expense Ratio: 0.49%
Many of the same sentiments that apply to the aforementioned LQD are relevant with the iShares iBoxx High Yield Corporate Bond ETF because the Fed is stepping into high-yield corporate debt, too, but in smaller fashion than in the investment-grade space.
Nonetheless, support from the central bank, which could prove critical for the flimsiest junk issuers, sent $7.71 billion of new cash into HYG between March 24 and May 26, a total surpassed by just LQD and GLD.
Note that HYG’s primary rival, the SPDR Bloomberg Barclays High Yield Bond ETF (NYSEARCA:JNK), would rank sixth on this list with $4.72 billion of inflows over the past couple of months, but it’s being included with HYG to add more asset class diversity to this list. In a post-coronavirus world, Fed support for junk debt could prove critical.
“Lenders who have made too many loans in the troubled sectors will suffer losses, and it is not yet clear who those lenders are,” said James Angel, associate professor of finance, Georgetown University McDonough School of Business. “There is a big question as to how many of the shutdowns will be covered by business interruption insurance, which could hit some insurers extremely hard.”
Invesco QQQ ETF (QQQ)
Expense Ratio: 0.20% per year
With $6.37 billion of inflows for the two months ending May 26, the Invesco QQQ ETF is the highest-ranking equity-based ETF on this list, underscoring the sturdiness of the technology sector and investors’ enthusiasm for stocks such as Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN).
Flows to QQQ are persistent this year, vaulting the fund to an exclusive club as one just of five U.S.-listed ETFs with $100 billion or more in assets under management. Three of those funds track the S&P 500, while the other delivers performances that are basically the same as that index.
For its part, the Nasdaq-100 Index, QQQ’s underlying benchmark, has a lengthy history of topping the S&P 500 — often by wide margins. That’s happening again this year and it’s probable that as tech supports the market, more investors will flock to QQQ.
Health Care Select Sector SPDR (XLV)
Expense Ratio: 0.13% per year
Investors’ affinity for the healthcare sector this year isn’t surprising. After all, this group is the epicenter of the race to treat and cure Covid-19 and that has been enough of a catalyst to send $4.76 billion of new cash into the Health Care Select Sector SPDR over the past two months.
Typically, it’s smaller biotechnology companies that benefit the most from scenarios such as the coronavirus competition. However, the race is so important and potentially lucrative that large-caps, such as Gilead Sciences (NASDAQ:GILD), Johnson & Johnson (NYSE:JNJ) and Pfizer (NYSE:PFE), have their fingerprints all over this competition.
For the investor that doesn’t want to stock pick in the virus vaccine fray, but wants to play some defense while accessing quality names with steady dividends, XLV makes a lot of sense.
U.S. Oil Fund (USO)
Expense Ratio: 0.79% per year
The U.S. Oil Fund proves retail investors can lift a fund to most bought ETFs status as that’s exactly who has been funneling money into this controversial product. Believe it or not, there were hefty rewards to be had in May with oil-related trades as the commodity jumped 85%, positing its best-ever monthly gain.
In other words, the Robinhood crowd, who particularly fond of USO, notched a win. Still, USO could subject investors to an array of potential pitfalls with oil volatility almost being the least of those issues.
That is to say USO’s popularity, unless profits are rapidly realized, can be misleading if not misguiding. If you’re the type of an investor that isn’t “active” but wants to make a longer-term bet on the energy sector recovering, look elsewhere.
iShares ESG MSCI USA ETF (ESGU)
Expense Ratio: 0.15% per year
Environmental, social and governance (ESG) ETFs are starting to have their moment and that’s expected to last over the course of the next decade. By 2030, BlackRock — one of the largest issuers of these funds — sees assets under management at ESG ETFs topping $1.2 trillion on a global basis.
The iShares ESG MSCI USA ETF is going to have a say. The fund had $7.22 billion in assets under management as of the end of May, of which $3.10 billion flowed in over the past couple of months.
ESGU, which turns four years old in December, follows the MSCI USA Extended ESG Focus Index and adheres to a traditional ESG methodology of limiting fossil fuel exposure while excluding gambling companies and gun makers, among others.
As is the case with many large-cap, broad market ESG funds, ESGU is slightly overweight technology stocks relative to traditional equity benchmarks.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.