Third Quarter ETF Fund Flows Show Broad Market Buying

The third quarter of the year is now in the books and newly released data shows ETF investors were net buyers of large-cap stocks over the last three months. ETFs that track the S&P 500 Index accounted for three of the five largest inflows, totaling over $16.5 billion in new assets.

Not surprisingly, the SPDR S&P 500 ETF Trust SPY led the way with $11.3 billion in new money. This capital surge came despite a relatively tepid 1.13 percent total return over the last three months. Investors have been eschewing small- and mid-cap stocks for stalwart large-cap names because of better relative strength and stability.

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Emerging markets were also a gainer of new asset inflows with broad-based ETFs receiving the bulk of these assets. The iShares MSCI Hong Kong Index Fund EWH saw strong buying action that totaled over $1.2 billion, much of it stemming from mid-August, before the recent protests in the country began.

After hitting a high in August, EWH has been sliding and is now down more than 12 percent from its peak. The current social unrest will likely need to be quelled in order for this ETF to regain its upward momentum.

Sellers

ETFs that saw the most selling last quarter included lagging regions of the globe, such as European equities, energy stocks and small caps. The Vanguard FTSE Europe ETF VGK and iShares MSCI EMU Index EZU both track a broad basket of companies based in the eurozone economy. These funds lost a combined $3.91 billion in assets as Europe copes with lackluster growth.

Another area that fell prey to trimming is the Energy Select Sector SPDR XLE, which lost $1.3 billion and 9 percent in the third quarter. This ETF tracks 45 large-cap energy stocks that were squeezed by deflating oil prices and a rotation towards growth-oriented sectors.

The recent commodity downtrend has been driven by the strong rise in the U.S. dollar index coupled with ample supply statistics showing slower than expected demand.

ETF fund flows are known to chase outperforming areas of the market, which can lead to cyclical changes each quarter. Often times the worst performing areas of the market can rebound in subsequent months as value dynamics take hold.

This list may look very different in the fourth quarter.