Index fund inflows and outflows show which asset classes are in favor

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Index funds are a curious thing.

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For one thing, many long-term investors swear by them as a way to automate retirement investing and create an allocated portfolio.

On the other hand, some investors rightly point out that too much reliance on index funds can limit other investment opportunities and force investors to cede control of their holdings.

Investors in index funds have the opportunity to diversify through single stocks and thematic funds, such as those that focus on a specific trend, such as cloud computing, the Chinese internet, robotics, animal care and the like. ‘clean energy. You may even overweight your portfolio in specific sectors or regions if you think those markets are well positioned to show gains.

There is an ETF for pretty much any theme you want, although ETFs tracking bitcoin and other crypto assets have yet to launch because the Securities Exchange Commission has yet to give its approval.

In August, ETFs listed on US stock exchanges brought in more than $ 67 billion.

The grandfather of ETFs is the ETF SPDR S&P 500 (ASX: SPY), which was launched in 1993 and currently manages $ 403.7 billion. In August, he added $ 5.1 billion.

Meanwhile, the Vanguard S&P 500 ETF (NYSEARCA: VOO) added over $ 4.8 billion.

Don’t overemphasize the S&P 500. Funds that track this index are a good way to gain exposure to large-cap national stocks, but many investors don’t see beyond this particular asset class.

This is where the concept of opportunity cost comes in. It is true that US equities have generally outperformed other asset classes in recent years.

However, by investing in something that tracks another asset class, you have a portion of other investments available as they increase.

For example, the ETF KraneShares CSI China Internet (NYSEARCA: KWEB) attracted $ 1.4 billion in new investment last month. Investors continue to seek opportunities in China, despite concerns about the country’s crackdown on tech companies headquartered there.

Chinese stocks are in an emerging bullish trend, having bottomed out in mid-August.

The KraneShares CSI China Internet ETF rose 8.26 over the past month, following a decline of 25.19% in the past three months and 31.38% year-to-date. As the price rose, the bullish volume was above average, a good sign of renewed investor confidence.

It’s also a great example of how investors end up rushing to buy shares of an asset that has been beaten. Does this mean that this fund, or Chinese internet stocks as a whole, will become the next high thief? Of course not. But it shows that investors are now turning to this asset class.

In what I see as a surprise, investors have also added net inflows to domestic fixed income. In particular, the IShares iBoxx USD Investment Grade Corporate Bond ETF (NYSEARCA: LQD) added $ 2.5 billion, while the IShares TIPS Bond ETF (NYSEARCA: TIP) added $ 1.7 billion.

Here too, inflows followed a period of net outflows. It’s no secret that the bond market is significantly underperforming stocks. Essentially, investors who put their money in fixed income securities have given up a huge amount in return, relative to the performance of domestic stocks.

Since the start of the year, the LQD ETF is down 0.77%. As a percentage, that’s not bad at all, and it’s not the kind of drop that in and of itself should scare off any investor. Over the past three months, the downtrend appears to be reversing, with a gain of 2.75%, although stocks fell on Tuesday.

For its part, the TIP ETF, which tracks the US index of inflation-protected securities, also fell on Tuesday and held on to small gains throughout the year.

Are investors changing their tone on bonds? In the medium term, that remains to be seen. But tracking charts or cash inflows and outflows can give you a good indication of how the larger asset classes in your portfolio – or those you plan to add – are performing.


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