For February 2018, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index had $18 billion in net outflows. It was the biggest outflow in dollar terms since the financial crisis.
Investor complacency may be a root cause.
From 1998 to 2016, the average monthly net flow as percentage of SPY’s AUM was 5.28% compared to 1.46% in 2017. Passive investing may have become a winning strategy last year because of the financial environment:
- Low interest rates: Historically low bond yields gave greater appeal to equities.
- Low volatility: Calm markets gave investors greater confidence to passively invest in the market as a whole rather than actively managing their exposure to risk.
This year, the Fed is expected to raise its overnight rate three or even four times, potentially pushing the longer end of the curve higher. In the absence of EPS growth, higher discount rates will put downward pressure on valuations, leaving higher-yielding bonds all the more attractive.
If February did indeed mark a secular shift back to higher volatility, investors may do well to invest actively and be more vigilant in managing portfolio risk.
Unless otherwise noted, data is sourced from Bloomberg.
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