The ETF Money Flow Highlights Potentially Profitable Trends

ETFsMike Burnick:  Last month, stocks shrugged off plenty of pessimistic data and profit reports to surge higher — with the S&P 500 Index climbing 8.3% in October — the best monthly gain in four years.

That’s a stunning reversal of fortune considering the dismal economy and depressing corporate results this quarter.

In fact, third-quarter GDP shows the U.S. economy slowing to a crawl, growing at a yearly pace of just 1.5% — less than half the growth of the previous quarter. Corporate profit reports have been equally demoralizing with 53% of stocks in the S&P 1500 Index reporting top-line sales that missed estimates. S&P profits are on track to fall more than 2% year over year, the second straight quarterly decline in earnings, which is a major red flag for me.

Still, you would never know it by the way stocks zoomed higher last month and new highs are now in sight. In fact, the S&P 500 is just 35 points away from its May peak! So, which stocks and sectors are investors flocking to, driving the market higher? The answer is twofold:

1. The return of an old familiar theme, and

2. Major reversals of fortune for the market’s biggest winners and losers.

I like to take a close look at ETF money flows on a monthly basis for evidence of new buying and selling trends. Because low-cost ETFs have grown so popular among investors, they’re a pretty good proxy for overall capital flows in global financial markets.

And here’s an interesting trend that re-emerged last month after being dormant in August and September: Global capital flows into U.S. stocks and out of International stocks.

Dr. Martin Weiss has highlighted this theme many times in the past year: the global tsunami of money flowing out of troubled economies in Europe, the Middle East and elsewhere, and seeking out safe-haven investments in higher quality U.S. assets.

Well, this theme played out in spades again last month with U.S. stock and bond ETFs attracting over $20 billion in fresh capital during October according to Bloomberg data.

Some $10.7 billion in capital flowed into U.S. equity ETFs last month alone. That’s a sharp acceleration in money flows to domestic stocks, up from the $6 billion of total inflows so far in 2015 through the end of September.

But it’s not just stocks that investors have a renewed appetite for: U.S. corporate bond ETFs enjoyed inflows of $8.3 billion in October —  the biggest single-month of money flow ever recorded.

Most of that cash was attracted to the riskiest bonds, which also offer the highest yields in a world of near-zero interest rates. SPDR Barclays High Yield Bond ETF (NYSEARCA:JNK) attracted $2.7 billion in assets — the most of any ETF last month — while iShares iBoxx High Yield Corp. Bond ETF (NYSEARCA:HYG) took in another $5.6 billion in assets.

That’s a big shift in investor sentiment from risk-off in August and September, to a big time risk-on bet again last month.

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In terms of stock market sectors, ETFs tracking consumer staples, technology and real estate had inflows of over $1 billion each last month. Tech and staples have been consistently strong performing sectors over the past 12 months, up 11.2% and 9.4%, respectively, and it looks like that trend is continuing into November.

In a stunning reversal of fortune, investors yanked $1.2 billion out of health-care ETFs, that’s after record inflows of $9.1 billion through the end of September. iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) accounted for $514 million of the outflow.

You can chock up this asset allocation U-turn to recent comments from presidential candidates about regulating pharmaceutical prices.

Internationally, Germany was one of the biggest losers with investors pulling $600 million out of ETFs that invest in Europe’s largest economy. iShares MSCI Germany ETF (NYSEARCA:EWG) suffered $354 million of those withdrawals.

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