Last August’s tumultuous trading climate was replaced this year by one that was so low-key that the financial media took to Twitter to discuss the market’s unusual state of quiet.
“Just 2.5 billion shares traded at the NYSE today; August poised to record lowest avg daily volume (~3bn shares) since May 2007,” tweeted CNBC’s Kelly Evans on August 29. Meanwhile Joseph Weisenthal, the financial blogger for Business Insider better known as @TheStalwart, had this to say: “Things are so slow, I just went through and accepted/denied 24 months worth of LinkedIn invites.”
It’s true, global trading volumes were lower than typical in August — historically an already slow month. But that did not mean investors or the ETF market were idle. In fact, the global exchange traded product (ETP) industry attracted $12.1 billion of inflows in August, which was more than twice the $5.3 billion collected in August a year ago. Investors were preparing their portfolios for the fall and, based on where the funds were going (hint – take a look at this chart below), it appears that they expect the final months of the year to be volatile ones.
With the presidential election approaching, questions about quantitative easing simmering and the fiscal cliff looming, investors put their dollars into gold and volatility funds – funds that could be considered defensive ones if turbulence returns to the markets.
In August, gold ETP inflows surged to their highest level this year. The category added $3.6 billion in assets, with both Europe and US-listed funds attracting solid investor interest. As Russ wrote in a recent blog, gold – more than any other commodity – is a natural beneficiary of the current monetary regime, which is characterized by negative real interest rates. Since 2010, gold’s correlation to the S&P 500 has been 0.06, a remarkably low correlation in an environment in which most assets, apart from Treasuries, tend to move together.
Overall global ETP holdings stood at 2,487 tonnes as of August 27, exceeding that held by Italy’s central bank. Gold ETPs now represent the fourth-largest holder of the metal behind central banks in the United States, Germany and the IMF.
Besides gold, we also saw investor interest increase for volatility ETPs, those funds whose performance is linked to the VIX index. Investors tend to gravitate toward volatility ETPs when they expect a meaningful change in volatility, and the segment gathered nearly $1 billion in August. Historically, in periods of market weakness, the VIX Index has demonstrated a negative correlation to the performance of US equity markets. By purchasing volatility funds, investors could be seeking a way to mitigate risk and protect their portfolio from potential losses in their equity investments.
August fund flows also showed that the hunt for yield has not yet cooled. Fixed income ETPs attracted $6.5 billion, and account for 36% of total industry inflows this year. All major fixed income categories attracted net inflows, led by investment grade corporate debt with $1.6 billion and high yield corporate with $1.3 billion.
Notably, fixed income ETPs reached a major milestone in August, taking in more than $50 billion in net new assets year to date. That surpassed the record annual inflows of $49 billion that we saw in all of 2011.
But the hunt for yield was not focused solely on fixed income funds. Investors put a combined $2.0 billion into equity dividend, real estate and preferred stock ETPs. In an upcoming blog post, I’ll explain why we believe the significant growth of these funds represents a secular trend within the industry.
Source: BlackRock Investment Institute, Bloomberg, National Stock Exchange
