Smart Money Hedging Their Bets – Weekly ETF Fund Flows
ETFs that hold US stocks attracted plenty of fresh money inflows last week. And the total amount of money in US listed ETF reached a new record high.
The ETF with the largest net inflow of money was the SPDR S&P 500 (SPY). It added $3.7 billion last week. The large influx comes on the heels of a massive $7.1 billion net inflow in the previous week.
That’s more than $10 billion that flooded into SPY in the last two weeks!
We also saw other broad based US Stock ETFs like the SPDR S&P Mid Cap 400 (MDY), iShares Russell 2000 (IWM), and Vanguard Total Stock Market (VTI) enjoy strong net inflows last week.
These types of inflows are typically indicative of institutional buying. But another explanation for the large influx of money into SPY could be the options market.
Right now many large investors are hedging their bets on US stocks. Over the last week, the volume of put options being purchased versus the number of call options has surged to its highest levels in two years.
These options will go up in value if the stock market goes down.
The market makers that write these options then hedge their risk. This results in a large influx of money into SPY and other ETFs that large investors are using options to hedge their stock holdings against another downturn.
Needless to say, a large influx of money into US stock ETFs at the same time as a large spike in put option volume isn’t exactly a bullish signal. This volume seems to be more indicative of hedging and fear than outright bullishness on US stocks.
Two areas that investors are undeniably bearish on are energy stocks and gold.
So it came as no surprise to see Energy Select Sector SPDR (XLE) and SPDR Gold (GLD) as the ETFs with the largest net outflows last week. XLE had $315 million in net outflows while GLD lost $234 million.
Despite the clear indication of nervousness among institutional investors, bullishness among individual investors continues to soar. Bullish sentiment increased 5.2% to 57.9% last week according to the American Association of Individual Investors Sentiment Survey. That’s the highest percentage of bulls since December of 2010!
Simply put, I don’t like this situation…
The smart money is fearful and hedging their bets on US stocks at a time when regular investors are more bullish than they have been in years. More often than not, the smart money is right and individual investors are wrong.
The ETF inflows, investor sentiment, and recent option volume are clearly indicating that something isn’t quite right. I’d follow the smart money and hedge your stock holdings hear or take some profits off the table.
Good Investing,
Corey Williams
Category: ETFs, Market Analysis
