When The Going Gets Tough, The Tough Use ETFs

ETFsInvestors talked and ETFs sure listened in June.

While we’ve written about market rollercoasters and nail biters here on the blog before, this past month was a doozy, and we saw investors turn to ETFs to express their rapidly shifting market views.

Heading into June, global ETF flows were following a record-setting pace, breaking through the $100 billion mark. But market sentiment shifted toward the end of May when Fed Chairman Ben Bernanke signaled that the Fed could slow its bond-buying program. After Bernanke said on June 19 that the Fed could begin tapering its monetary stimulus before the end of 2013, yields on the 10-year Treasury jumped and global investors –who have become hypersensitive to central bank comments – reacted quickly, selling emerging markets equity, gold and fixed income ETFs.

June marked the first time global fixed income ETFs saw monthly outflows since December of 2010. Investors moved into shorter duration ETFs (which are generally less sensitive to interest rates and will lose less when rates rise), and the category attracted $5.5 billion of flows globally. But other fixed income maturity categories saw outflows of $13.5 billion globally.

In total, global ETF outflows for June totalled $8.2 billion, and it was the first month of outflows since November of 2011.

Simultaneously with these flows, US ETF volumes spiked in June (see below), once again illustrating how investors are using ETFs to express market sentiment – even when that sentiment changes dramatically.

This is a trend we’ve seen before. When headline-making news triggers a sudden shift in investor sentiment and market volatility jumps, it has been followed by elevated ETF trading volumes in absolute dollar terms and also in proportion to total US equity market trading volumes. In June, ETFs accounted for 31% of the dollar value of all trading volume in US equity markets, up from 20-25% in recent months.

It’s important to note that June saw orderly trading of ETFs and, as designed, ETFs delivered liquidity under stressed market conditions.2 Investors were able move quickly and efficiently in and out of investment exposures, and this is a trend we expect will continue as more investors turn to ETFs to execute precise market views.

Dodd Kittsley, CFA, is the Head of Global ETP Market Trends Research for BlackRock and a regulator contributor to the iShares Blog. You can find more of his posts here.

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