Bond ETF Makes A Surprise Appearance – Weekly ETF Fund Flows

| December 9, 2013 | 0 Comments

fund flowsToday we’re taking a look at ETF fund flows in Vanguard Total Bond Market ETF (BND) and iShares Russell 2000 ETF (IWM).

ETF fund flows are a valuable indicator of what traders are thinking.  It takes a lot of buying or selling to drive millions or even billions of dollars into or out of individual ETFs.

Fund flows are something traders use to find trends and gauge investor sentiment.  And it can help you pinpoint which ETFs could be next to make a big move higher or lower.

Let’s take a look at the ETFs that experienced large inflows or outflows last week…

Last week the Vanguard Total Bond Market ETF (BND) made a surprise appearance among the ETFs with the most inflows.  It collected $249 million in new assets.

BND is the largest Bond ETF with $109 billion in assets under management.  It currently holds more than 6,000 bonds that are representative of the US investment-grade bond market.

The portfolio of bonds is made up of 66% US Government debt with the rest coming from investment grade corporate debt.  BND has an expense ratio of 0.10% and a yield of 2.19%.

Over the last 32 years, bonds have been in a bull market.  The amazing run for bonds has happened because interest rates have been trending lower over that time.  As interest rates fall, the value of bonds with a coupon rate above the current offered rate go up in value.

With interest rates currently near 0% and the Fed nearing the end of the monetary stimulus known as QE, many investors are calling for the end of the bond bull market.

However, the recent influx of money into BND seems to contradict the speculation about the demise of bonds.  And for good reason…

The initial reaction to the expected end of QE has already sent interest rates higher.  When interest rates rise, the value of BND goes down.

At this point, the bond market has already priced in the end of QE.  In order for BND to continue falling, interest rates would need to rise further.  But with low inflation and unemployment over 7%, the likelihood of the Fed raising interest rates in 2014 still seems remote.

What’s more, as millions of baby boomers retire, they will continue to invest in bonds as a way to generate income and preserve their wealth.

The ETF that saw the most money flow out the door last week is iShares Russell 2000 ETF (IWM).  It lost $1.1 billion last week.

As the name suggest, IWM tracks the popular Russell 2000 small cap index.  IWM is up 35% year-to-date.  It has a dividend yield of 1.26% and an expense ratio of 0.25%.

Needless to say, small cap stocks have enjoyed a great year.  They’ve outperformed the large cap stocks in the S&P 500 by about 6% this year.  In my opinion, the outflow from IWM is most likely profit taking.

Another reason for the interesting money flows last week could be end of year portfolio rebalancing.  The inflow of money into the underperforming BND fund at the same time funds are flowing out of the outperforming IWM smacks of portfolio rebalancing.

That wraps up this week’s ETF fund flows…

Keep in mind, there’s a lot of information about ETF fund flows.  And it can be a very useful tool as long as you know what you’re looking for.

Good Investing,

Corey Williams

Tags: , , , , ,

Category: Bond ETFs, ETFs, Market Analysis

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets three times a week. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

Leave a Reply

Your email address will not be published. Required fields are marked *