Based on decades of experience, I’ve learned to pay more attention to what investors are actually doing with their money, instead of what they’re saying in the Wall Street Journal or on CNBC.
Talk is cheap, but following the trail of cold hard cash tells you whether or not investors are putting their money where their mouths are.
That’s why I focus on money flows for both stocks and, especially, ETFs. These flows tell you where investors are really committing their capital, and more importantly, they can signal when the tide is turning.
In a world of near- or sub-zero interest rates, investors have been desperately seeking income anywhere they can find it. Even in asset classes that used to be considered high risk. Case in point: Investors have been jumping into junk bond ETFs with both feet over the past few years. You can see it in the numbers.
|Investments with at least some yield have been in demand in this near- or sub-zero rate environment.|
The iShares High Yield Corp. Bond ETF (HYG) has attracted $3.3 billion in net cash flows from investors over the last three years; $1.9 billion of that has flowed into HYG just so far this year.
Meanwhile, over the same time frame the SPDR High Yield Bond ETF (JNK) enjoyed net inflows of $3.6 billion, with $2 billion in buying year-to-date.
And you can see why investors are suddenly in love with junk. With Treasury bonds yielding less than 2% today, what’s not to love about the 6% yield offered by JNK.
But how many of the investors who shoveled billions into this ETF ever stopped to think the price could easily fall 6% in a week or less, wiping out all their hard-earned income, and then some?
What’s the lesson to be learned? Well, don’t reach for yield, of course. That’s the easy one, but there’s another more important lesson.
|“Fund flows are nothing more than a popularity contest.”|
Fund flows are nothing more than a popularity contest. And the ETFs voted most popular in terms of hot money flows last year aren’t necessarily the ETFs most likely to succeed going forward.
Huge inflows over a long period, say one to three years, are a sign that you’re late to the party. The big upside move for an ETF, fueled by all that hot money, may be almost over. Worse, the tide may be about to reverse.
Sure enough, taking a closer look at recent ETF fund-flow data from Bloomberg over the past 30 days reveals a very different picture.
Over the past month, $882.4 million has flowed back OUT of JNK, and another $673.1 million in cash has been yanked from HYG. So is the party over?
Here’s an interesting piece of corroborating evidence: Moody’s reports that the U.S. speculative-grade (i.e. junk debt) default rate stood at 5.1% in June, the highest level since August 2010, and above the average rate of 4.2% since 1983!
So let’s summarize:
Junk bond ETFs have attracted record amounts of dumb-money cash flows from yield-starved investors …
These are still among the best-performing ETFs year-to-date, but money is now flowing out, indicating the tide may already be turning …
Junk bond default rates are rising to the highest level in nearly six years …
What could go wrong? Junk bond buyers beware.
The Russians aren’t coming! In track and field, at least, it seems. Russia lost its appeal against the Olympic ban on its track and field athletes, a move that could lead to a total ban of the country’s athletes from next month’s Summer Games in Rio de Janiero. The Court of Arbitration for Sport rejected the appeal by 68 Russian athletes who sought to overturn the ban imposed by the International Association of Athletic Associations after allegations of state-sponsored doping and cover-ups. The athletes still have a chance, however, to compete. The court stressed that the decision is not binding on the International Olympic Committee and that the committee has the final word in the matter.
“The door is open for the IOC to decide, to determine even on a case-by-case principle whether these athletes are eligible or not,” said court General Secretary Matthieu Reeb in an Associated Press report. The IOC said it would “study and analyze the full decision” and a reach a final ruling “in the coming days.” The Games start Aug. 5.
Republican presidential candidate Donald Trump reportedly said that the U.S. shouldn’t automatically come to the defense of its NATO allies if they are attacked – and his remarks have raised concerns among fellow Americans and foreign allies. After Trump’s comments were reported in The New York Times, NATO Secretary General Jens Stoltenberg was quoted by BuzzFeed News: “Solidarity among allies is a key value for NATO. This is good for European security and good for U.S. security. We defend one another.” NATO’s treaty guarantees that an attack on any member state constitutes an attack on all.
Presumptive Democratic presidential nominee Hillary Clinton responded: “For decades, the United States has given an ironclad guarantee to our NATO allies: We will come to their defense if they are attacked, just as they came to our defense after 9/11. Donald Trump was asked if he would honor that guarantee. He said… maybe, maybe not. Ronald Reagan would be ashamed. Harry Truman would be ashamed. Republicans, Democrats and Independents who helped build NATO into the most successful military alliance in history would all come to the same conclusion: Donald Trump is temperamentally unfit and fundamentally ill-prepared to be our commander in chief.”
OK, get those holdouts to finally make the change! Most of us know people who refuse to use the new technology and who insist on sticking to their VHS machines to record television shows. Now, however, Funai Electric, the last maker of VHS-compatible videocassette recorders, says it’s going to stop making the machines by the end of this month, citing a decline in sales. The VCR hit the markets in the mid-1970s, but new technologies have replaced the system. Times are changing … Makes you wonder if there are any Betamax holdouts out there.
Are junk bonds ready for the trash heap? Should Russians be banned from the Olympics? Does NATO still have value? Still holding on to your VHS-related devices and cassettes? Do you have views on these or other matters that you want to share with your fellow readers? Comment below.
The Money and Markets Team
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