ETF Flows Reveal A Risk-On Reboot—With Bond Insurance

ETF buyers gave little indication of concern last week, investing $18.3 billion in U.S.-listed funds, based on fund flow data by etf.com. Interestingly, the trend showed that investors leaned into a barbell strategy, splitting their bets between growth and safety.

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Equities and bonds share the limelight. U.S. equity ETFs took the crown with $8.7 billion of inflows as the market traded close to record levels. The Vanguard S&P 500 ETF VOO led the way, attracting $2.5 billion, while international equity funds contributed another $1.5 billion, headed by the Vanguard FTSE Developed Markets ETF VEA.

Fixed-income funds were close behind, collecting $6.9 billion in the face of speculation that the Federal Reserve might switch to cuts in rates as soon as next month. The Capital Group Municipal High-Income ETF CGHM was a standout with a whopping 88% increase in assets, followed by Vanguard Intermediate-Term Corporate Bond ETF VCIT and iShares 0–3 Month Treasury Bond ETF SGOV both of which collected more than $1 billion each. International fixed-income ETFs collected another $2.2 billion.

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What The Trend Indicates

The trend indicates that investors are employing a barbell strategy, i.e., allocating money between two ends: more conservative assets such as bonds for safety, and riskier assets such as equities for growth, and avoiding middle-ground exposures. This strategy is employed to align downside protection with upside potential.

Elsewhere, investors switched out of hard assets. ETFs that track commodities lost $674 million, while currency products experienced $1.6 billion of net outflows. Inverse products also suffered, losing 4.5% of assets, which indicates that traders betting against the market were less popular. Leveraged products, however, attracted $1.5 billion, which indicates bull plays are fashionable again.

Bottom line

The flows indicate a market attempting to have it both ways, accepting growth but with some ballast in bonds. Defensive trades and commodities are losing their luster, but the risk-on tone implies investors are continuing to wager the bull run has legs.

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