ETF Hot Potato! Investors Were Highly 'Active' In 'Passive' During Selloff

Ok, here’s the thing. You can’t listen to cynical people when it comes to ETFs.

Fortunately, we’re not cynical people.

No matter what anyone tells you, the rampant proliferation of ETFs is an unequivocally positive development because they allow long-term, fundamentals-minded investors to allocate as they see fit at very low cost thus freeing them from the tyranny of nefarious money managers who charge exorbitant fees because they are greedy bastards who can’t be trusted to look out for retail investors’ money.

Those are the facts. And sure, there are tons of mutual funds that are low-cost indexing vehicles and thereby offer the exact same benefits in terms of allowing long-term, fundamentals-minded investors to allocate at virtually no cost and yes, you might reasonably ask why a “long-term” investor needs instantaneous liquidity if the mantra is “buy and hold”, but if you’re asking that question or if you’re predisposed to saying something like “well what was wrong with a Vanguard mutual fund?” you’re a cynical person who can’t be trusted, ok? Ok.

And because ETFs are definitely vehicles that attract long-term, fundamentals-minded investors, there’s no way that people would have sold SPY en masse last week, effectively negating the entirety of the massive January inflow which was itself certainly not a manifestation of people using ETFs to speculate on short-term gains, right? Right.

Or actually no, that’s entirely wrong. Because as it turns out, SPY saw a record $23.6 billion in outflows last week. As Bloomberg’s Luke Kawa writes, “the five-session stampede for the exits erased the previous nine weeks of inflows into the fund.”

SPY

“Retail investors had poured more than $100bn into equity ETFs during January [and] of that $100bn, $40bn was invested into US equity ETFs,” JPMorgan wrote on Friday. “So more than half of the $40bn that had entered US equity ETFs in January has been withdrawn already. So again, the picture we are getting in the US equity ETF space is one of advanced rather than early stage de-risking.”