ETF Buyers Went On the Defensive During a Rough October

(Bloomberg) -- Flows into exchange-traded funds last month sent a bearish signal during all the market turmoil.

Investors put just $4.7 billion into U.S.-listed funds in October as the S&P 500 Index declined 7 percent, marking one of the worst months of the equity bull market. The flows were light compared to the $23 billion or more that funneled in during each of the three previous months.

“Fear was driving the markets,” said Jeff Carbone, a managing partner at Cornerstone Wealth in North Carolina. “The concern that everybody has is what’s going to happen with trade, what’s going to happen with China, what’s going to happen with interest rates and what’s going to happen with the election. Those key factors made October one of the worst months in recent history.”

Defensive Factors

As the downturn took hold, ETF investors turned toward some classically defensive factor funds, particularly those that focus on avoiding volatility and holding cheap stocks. The iShares Edge MSCI Min Vol USA ETF, ticker USMV, took in $787 million in October, the most for any month going back to 2016, even as it declined 4.1 percent. The fund tracks U.S. stocks with lower volatility characteristics -- Pfizer Inc., McDonald’s Corp., Visa Inc., Johnson & Johnson and Coca-Cola Co. are its top five holdings.

ETF Buyers Went On the Defensive During a Rough October

“This is one of those cases where inflows are actually bearish,” said Bloomberg Intelligence analyst Eric Balchunas. “We’re so used to net inflows into ETFs being bullish, but people forget ETFs cover everything, including things used to protect or buffer a portfolio.”

Investors also poured $896 million into the iShares Russell 1000 Value ETF, IWD, in October, the most for any month this year. The buying really picked up toward the end of the month with six straight days of inflows, the longest streak in almost a year. IWD fell 5.2 percent in October, its worst month since 2016, but still better than the S&P 500.

Short-Term Debt

Strategies targeting short-duration debt also were attractive, as investors sought safety from volatility and a way to hedge interest rates. The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF, ticker BIL, raked almost $1.8 billion in October, the largest monthly inflow since August 2011. In aggregate, funds tracking bonds maturing in less than 12 months took in $5.6 billion last month, the most since at least November 2011, according to Bloomberg Intelligence data.

ETF Buyers Went On the Defensive During a Rough October

“As the yield curve has flattened, investors go into shorter-duration instruments because they will get a better yield while minimizing market risk,” said Mohit Bajaj, director of ETFs at WallachBeth Capital. “As year-end is approaching, certain investors do not want to take any further chances with the market continuing to sell off. They are happy to lock in profits.”

Looking Abroad

While domestic U.S. stocks suffered, investors turned their attention overseas to other developed nations. The iShares Core MSCI Total International Stock ETF, ticker IXUS, had $1.8 billion of inflows in October, the most in its six-year existence. The fund tracks developed countries across the globe, excluding the United States. Companies from Japan and the U.K. combined make up almost 30 percent of the fund.

ETF Buyers Went On the Defensive During a Rough October

That said, investing abroad and snubbing the U.S. didn’t necessarily help either last month. IXUS fell 8.3 percent in October, almost 1 percent more than the MSCI World Index, which includes U.S. equities.

“Certainly international has been less volatile than the U.S. in terms of flows,” said Christian Fromhertz, chief executive officer of Tribeca Trade Group. “But it’s still spotty.”

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