The S&P 500 exodus in particular sends the message that large-cap stock leaders of this bull market are no longer a free lunch, and that makes sense — it's even a little late for those investors just getting the message about diversification and asset allocation. But a deeper dive into the ETF flows in March, and the ETF performance leaders this year, shows where investors who do believe in staying in the market are going rather than the S&P 500.
Here are the three ETFs that led inflows, according to FactSet, in a brutal month that ensured the February-March period combined would be the first time there have been consecutive monthly outflows from ETFs since 2008 — and three straightforward lessons they reveal about investing.
1. iShares Core MSCI EAFE ETF (IEFA): $5.2 billion
2. iShares Russell 2000 ETF (IWM): $2 billion
3. iShares Short Treasury Bond ETF (SHV): $1.8 billion
1. Stock diversification means not limited exposure to the U.S. market, no matter what Buffett and Bogle say.
2. If you insist on a U.S. stock-centric view of the world, at least accept that a trade war makes a good case for adding small-cap market exposure: It is a universe less exposed to overseas revenue.
3. No matter how many times the traders and talking heads say the bull market in bonds is over and it's time to sell bonds, investors will flock to bonds in periods of uncertainty, and there was every reason to expect that after nine years of gains, a correction was in the cards. Bonds still are not doing well, but investors who want to maintain exposure to bonds have been shortening up on bonds they are holding.
Year-to-date SHV is up, though not by much, and IEFA and IWM are both down, though by less than U.S. stock indexes. But the point is not to head to a hot bet, it's to have an investing plan that makes sense over the long term.
"Even long-term-focused investors are nervous now," said Neena Mishra, director of ETF Research at Zacks Investment Research. "Factors that drove fund flows are easy to understand— small-cap outperformance due to trade concerns, international diversification and shortening of duration of bond portfolios," she said.
The S&P 500 outflows were led by the SPDR S&P 500 (SPY), which bled more than $10 billion, but the SPDR family has never been the best read on the individual investor as its history has been more closely associated with institutions and traders who were early into ETFs. The iShares ETFs, though are tools used by advisors. Its S&P 500 ETF saw more than $9 billion in outflows in March. "The fact that iShares Core S&P had a big outflow, it looks to me that it's a reflection of advisor-led reallocating," said Mitch Goldberg, president of investment advisory firm ClientFirst Strategy.