High Yield Flows Are Back … But What Side Are They On?

High-yield ETF flows have been an interesting segment to monitor this year. On an absolute basis, rising rates have certainly hurt performance, but credit spreads continue to narrow, making the segment a strong relative performer in a challenging year for fixed income. Yet ETF investors certainly have not been convinced, and high-yield ETFs saw net outflows of nearly $4.5 billion through June 30. In July, however, high-yield ETFs came back in vogue and had their best month since July 2017, with nearly $2.3 billion in net new flows.

Zeroing in on high-yield ETFs with greater than $1 billion in AUM offers a different picture, however. Short interest levels (shares that have not been closed out in a short trade) ended the month of June at 26 percent of collective shares outstanding, a record for the category. Not only have ETF investors largely dumped high-yield funds this year, but any ETF inflows have been partially due to short selling. As retail investors exit with a steady headwind of rising rates, institutional investors are currently taking a tactical view that record tight credit spreads may (finally) start to widen a bit – all continued bearish warning signs from the ETF market.

Emerging Market ETFs Crawling Out from the Depths

Emerging market outflows are another trade that is perhaps starting to stabilize and turn a corner. The broad MSCI EM Index returned 2.2 percent in July, its first positive month since the start of the year. But investors are still hesitant to dive in, with only $412 million in net inflows into EM assets during July, a paltry figure compared with January’s raucous inflow of nearly $15 billion. The global trade war certainly hasn’t helped sentiment this year—we found an inverse relationship between the number of Google searches for the word “tariff” and emerging market ETF flows. We think sentiment around global trade fears will continue to act as a near-term indicator of category interest.

The month of July saw hot trades change course, including small-cap underperformance, value outperforming growth, and international markets starting to regain health, although they are still lagging the United States. The question for investors may be whether these newfound cracks in the momentum trade are glimpses of a new regime coming into play or simply a blip on the radar. As July’s strong ETF flows proved, regardless of what trends take shape, ETFs continue to offer liquidity and access to many different segments of the market, keeping the investment vehicle on a continued and steady upward growth trajectory.

David Mazza is head of ETF investment strategy at OppenheimerFunds. Christopher Clark and Sam O'Connell from OppenheimerFunds Beta Solutions team also contributed to the article. 

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