On this week’s episode of ETF Prime, host Nate Geraci and VettaFi Investment Strategist Cinthia Murphy analyze ETF flows and trends after a wild week in the markets. Later, Geraci welcomes VistaShares CEO Adam Patti to discuss the firm’s unique approach to ETFs.
All Eyes on Leveraged ETF Flows
Last week was another wild one in the markets, characterized by significant volatility. The S&P 500 ended the week up nearly 6% despite huge swings in both directions.
Leveraged ETFs were among the top ETFs by inflows last week as some investors ratcheted up their risk as markets turned more volatile. The ProShares UltraPro QQQ (TQQQ ), the Direxion Daily Semiconductor Bull 3x Shares (SOXL ), and the Direxion Daily TSLA Bull 2X Shares (TSLL ) were among the top funds by weekly flows.
“The first thing that I noticed is that it doesn’t matter — rain or shine or massive thunderstorm — investors are out there buying ETFs to position themselves for whatever the market brings, which I think is a positive thing.”
Murphy said the massive flows into leveraged ETFs was shocking. Notably, these are parts of the market that investors were bullish on until this massive slowdown. These leveraged ETFs are tapping into what is seen as a long-term theme that has really strong fundamentals.
“So is this like buying the dip on steroids? That’s what it looks like,” Murphy added.
Importantly, investors need to take caution when investing in leveraged ETFs. Some of these funds were able to capture daily returns upward of 50%. However, the leverage will compound just as quickly on the days the market is down.
“If the market recovers the next day and you’re still holding this thing, you need that much more just to break even. So the recovery from the losses is a bear if you really sit on these leveraged funds. So they’re super, super risky, because they compound so quickly,” Murphy explained.
Large-Cap Equity ETFs Continue to Attract Assets
The strong flows builds upon a strong start to the year, as ETFs are taking in about $100 billion per month, on track for another record year. Notably, around $44 billion has already flowed into ETFs in April to date.
Of that $44 billion flows into ETFs month to date, about $40 billion has gone into equities. The SPDR S&P 500 ETF Trust (SPY ), the Vanguard S&P 500 ETF (VOO ), and the Invesco QQQ Trust Series (QQQ ) were the top three funds by flows last week overall.
“It’s a little bit reassuring that … investors are still buying broad U.S. large-cap, cheap, passive, core building blocks for the long term,” Murphy said.
Even as international ETFs are getting significant attention, Murphy believes the outlook for U.S. equities remains constructive.
“Long term, U.S. equities have consistently outperformed international equities,” Murphy said. “If we’re having this much trouble this year, I mean global trade is a global issue, so I think it’s going to be tough for everybody. I think it makes sense to remain positive on long-term U.S. equity outlook.”
Fixed Income ETF Flows Pivot
Moving to the fixed income space, while rates did spike last week, money moved out of bank loans and CLO ETFs, which are floating rate in terms of how they’re structured. Instead, investors were moving into the shorter end of the curve.
The funds that saw outflows included the Janus Henderson AAA CLO ETF (JAAA ), the Invesco Senior Loan ETF (BKLN ), and the SPDR Blackstone Senior Loan ETF (SRLN ).
Meanwhile, beneficiaries were Treasury ETFs like the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL ), the iShares Short Treasury Bond ETF (SHV ), and the iShares 0-3 Month Treasury Bond ETF (SGOV ).
“If you are really worried about the economy slowing down and things aren’t looking good, which was the story last week, then you look for safe havens,” Murphy said. “But then yield should have gone down, not up, because demand would have been up. So the bond market wasn’t doing what we thought it was going to be doing at a time when we were all looking for safety.”
“I think what the ETF numbers show is that investors were dumping credit risk and duration risk,” Murphy added.
VistaShares Looks to Carve Niche in ETF Market
VistaShares last month launched the VistaShares Target 15 Berkshire Select Income ETF (OMAH). The fund holds the top 20 public equity holdings in Berkshire with an active options overlay to generate income.
“What we wanted to do was create a product where you can invest like Warren Buffett, but with income,” Patti said.
A unique feature of the fund is the use of call spreads to generate income for investors. “We do that to try to retain some of the upside potential,” he added.
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