“Getting your bell rung” usually refers to when a football player gets hit so hard, they lose consciousness or become dizzy—the first sign of a concussion. 

Concussions much like today’s market are also hard to predict1, and after the onslaught of trade-related Twitter blitzes, where new tariffs were on then off again in just a matter of days, the market’s price reaction was dizzying. There were 11 days in August where the S&P 500 Index either rose or fell by more than 1%. If fundamentals are the markets padding within its helmet to protect against geopolitically fueled volatility strikes, it might as well be one of those leather helmets from the 1940s.  

Accommodative monetary policies address the symptom, not the root cause but much like preventing concussions in football, the reality of reduced geopolitical uncertainty in today’s market is a long way away. 

For investors, therefore, a more defensive-oriented ground-and-pound approach might offer the best bet moving forward in an unpredictable environment. 

Off pace 

Stocks’ frequent trips to the concussion protocol blue tenthave left ETF fund flows well off their pace from last year. The $148 billion amassed through August is 13% off of last year’s figure at this time. Luckily, fixed income ETFs have been the Nick Foles to equity flows Carson Wentz,3 as they have carried the load while equity flows have been hurt.

Fixed income ETFs are more than 50% above their pace from last year: inflows of $14 billion in August mark the 49th month out of the last 50 that bond ETFs have had positive flows.

Like fixed income, flows into gold-backed ETFs are robust. Notional figures do tell a strong story, but going one level deeper reveals an even more positive trend.

Using our continuous flow momentum process (more on this in the sector section), gold-backed ETFs have consistent demand on par with Brexit and the Q4 2018 drawdown time periods. So not only do gold-backed ETFs have large net demand (i.e. notional flow totals), but also are exuding a consistent, and persistent, demand trend.

Over the last trailing month, gold-backed ETFs saw inflows nearly 80% of the days. At 77%, this is only 6% off the Brexit all-time high of 83%. Given geopolitical tensions and negative yielding debt, gold-backed ETF demand should continue.   

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Source: Bloomberg Finance L.P., State Street Global Advisors, as of August 31, 2019. Past performance is not a guarantee of future results.

He hate…EM

Emerging markets (“EM”) have been hit hard in the current environment, with $6.6 billion of outflows in August, extending their losing streak to four consecutive months of outflows. This is a reversal of Andrew Luck retirement4 proportions from when EM ETFs posted nine straight months of inflows in late 2018 and through April this year. If the trade uncertainty persists and continues having a material impact on fundamental and economic growth trends, this bearish sentiment towards EM is likely to remain.  

The chart below depicts the “true” emerging market monthly flow totals.  True, as in reclassifying regional, single country, and currency hedged ETFs based on their market of focus.  For instance, single country China ETF fund flows are included in the “true” total, as China is an EM nation. Same for currency hedged emerging market fund flows.  

Using this metric, emerging market flows for August (-$8.9 billion) were the lowest monthly flow total since the great financial crisis. If this were a football team’s performance in a season, emerging market fans would be wearing paper bags over their heads.

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Source: Bloomberg Finance L.P., State Street Global Advisors, as of August 31, 2019. Past performance is not a guarantee of future results.

Sectors stuffed

Sector flows were negative once again this month, led by cyclical sectors sensitivie to the trade tensions as a result of their global footprint (e.g. Energy, Materials, and Industrials).  And, of course financials. Financials are the Eli Manning5 of sectors, constantly getting picked off and beaten up. With the yield curve, not only flattening but inverting, Financials had nearly $4 billion of outflows in August – pushing the trailing 12 month total to a downright abysmal -$17.9 billion. Over that time period, there have been only two months where financials had inflows.   

Inflows were concentrated in defensive segments, with Technology being the only cyclical sector to witness inflows. These inflows were modest, however, as trade tensions have restricted positive sector sentiment considering 60% of its revenue comes from overseas. 

We are showcasing a different process of examining flows, basing the analysis on the well-regarded frog-in-pan (“FIP”) momentum theory6, which discusses targeting areas of the market with a series of frequent gradual changes (e.g., daily positive returns). The FIP theory finds this continuous information induces strong, persistent return continuation that does not reverse in the long run. So, rather than just looking at flows on a net basis to dissect a sector with potential to outperform, we examined sectors based on the number of days with positive inflows to identify a possible current consensus from consistent inflows in a time period. 

The key takeaway from the chart below is that only two defensive sectors (Staples and Utilities) had inflows on more than 50% of the days in August. In fact, those two defensive sectors, along with the high dividend paying bond-proxy Real Estate sector are the only sectors with more than 50% of flows over the last two months.  

Not surprisingly, Real Estate, Utilities, and Staples rank first, third, and fourth based on momentum scores. Flows have followed returns and the play call has been “prevent”7 defense for tactical sector strategies.

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Source: Bloomberg Finance L.P., State Street Global Advisors, as of August 31, 2019. Past Performance is not a guarantee of future results.

Investors probably should brace for more uncertainty, whether spurred by tweets, trade or both. Stay current on what State Street Global Advisors is seeing in ETF flows: Follow SPDR® Blog and check back monthly for my ETF Flows post.

1Concussions have been proven to lead to chronic traumatic encephalopathy (CTE), a neurodegenerative disease caused by repeated head injuries. Symptoms may include behavioral problems, mood problems, and problems with thinking. Symptoms typically do not begin until years after the injuries.
2 The National Football League (“NFL”) in recent years installed blue pop-up tents to perform medical evaluations on the field, but with privacy.  The tents are used to perform immediate analysis under the concussion protocol guidelines.   
3In the 2017 season, Philadelphia Eagles quarterback Carson Wentz was injured for the season in Week 14, following this game Nick Foles came in and led the Eagles to their first title since 1960.
4Andrew Luck was standing on the sideline at Lincoln Oil Stadium watching his teammates play the Chicago Bears in a preseason game when the stunning news broke that the QB was retiring from the NFL.  Fans booed him as he walked off the field.
5Eli Manning was sacked almost 50 times last year and has had double digit interceptions ever year for his entire career, except his rookie season when he played just 10 games.  He has led the NFL three times in interceptions.  
6Frog in the Pan: Continuous Information and Momentum, Da, Gurun and Warachka (2013).
7The prevent defense is a defensive alignment in American football that seeks to prevent the offense from completing a long pass or scoring a touchdown in a single play and seeks to run out the clock.


Bloomberg Barclays US  Aggregate Bond Index
A flagship measure of investment grade debt issued US dollars. The benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds. 

The MSCI ACWI Index captures large and mid-cap representation across developed and emerging markets countries. 

Russell 2000  Index
A benchmark covering 2,000 small- capitalization firms domicled within the US.

S&P 500 Index
The index includes 500 leading US companies and captures approximately 80% coverage of available market capitalization

Smart Beta
A term for rules-based investment strategies that don’t use conventional market-cap weightings. 

A term for the withdrawal of the United Kingdom from the European Union. 

Russell 1000 Value Index
Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

Russell 1000 Growth Index
Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.