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Large cash outflows may signal trouble in these sectors.
Whenever there are large outflows or inflows into various sectors, usually notable by proxy through sector ETFs, it can tip investors off to changes in psychology. Sometimes large movements of money, which often come via large institutions, can tell you that a big move is coming in the sector. Inflows may suggest a big up move, while outflows may suggest a big downward movement.
You can’t always be certain, however. Some view the “smart money” as a contrarian signal, suggesting you move in the opposite direction.
Today we’ll look at large cash outflows in three ETFs and see what they may be telling us.
There were some cash outflows from iShares Global Energy (NYSE:IXC). I think there may be several things going on here. First, this ETF has 55% of its assets in its top ten holdings, which are all the big-name global energy companies. This includes BP plc (NYSE:BP), which came in with disappointing earnings, driven by sanctions against Russia, which are filtering through into its oil industry.
There are also concerns regarding the state of the world economy. If things continue to struggle around the world, it suggests there will be less energy demand, which would drive oil prices lower.
To me, however, I see this as a contrarian signal. I believe you want to be in energy for the very long-term, because the world will always need fossil fuels, and alternative energies simply do not have material market share (and likely never will). So if you’re in energy for the short-term, perhaps you follow the money here. If you are in it for the long-haul, I wouldn’t be moved.
SPDR Barclay’s High-Yield Bond ETF (NYSE:JNK) basically invests in high-yield corporate debt, also known as junk bonds. The word “junk” is really a misnomer, if you ask me. It does mean that the bonds are not considered to be high grade bonds, and that they have a greater-than-average risk of default – meaning the company that issued the bonds will not make good on its interest payments or principal.
Junk bonds, however, have recently been a relatively safe place to find yield. With regular bonds yielding very little, investors moved further out onto the risk curve to find those higher-yields.
Now, however, the outflows suggest that sentiment has changed. The reason bond yields were low was because the Fed was buying $80 billion of bonds every month for the past several years. That meant bond prices rose while yields fell. The Fed’s bond-buying is about to end. Some fear that without that artificial demand, that bond buying will decline, and possibly even become bond selling, which would raise yields.
If regular bond yields rise, the price of high yield junk bonds will decline. That’s because these regular bonds are “investment grade”. If you can earn yields close to those of junk bonds in safer bonds, people will dump the junk.
I think there is some wisdom to this. You may want to scale out of high-yield bonds and follow the outflows here.
Finally, iShares MSCI Poland Capped (NYSE:EPOL), iShares MSCI Germany (NYSE:EWG), iShares MSCI Switzerland Capped Index (NYSE:EWL) and iShares MSCI United Kingdom (NYSE:EWU) all are seeing outflows. This may be due to the fact that the European Central Bank actually cut the deposit rate to -0.15% in June, and that the big money hasn’t been impressed with the results so far.
It may also be the European debt crisis, which gives investors plenty to worry about.
The fact that all of these ETFs are seeing large cash outflows likely suggests that the big money sees greater upside in other investments. I don’t care for individual country ETFs anyway, as there isn’t enough diversification, so I’d be inclined to sell out and maybe find a global diversified ETF instead.
Lawrence Meyers does not have a position in any security mentioned.
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