Call it an ETF exodus.
U.S.-based exchange-traded funds have seen $7 billion leave their portfolios in May alone as the major averages stay on track for the first negative month of 2019.
But while the action might make it seem like investors are losing faith in the perpetually growing ETF market, experts say it's more likely that buyers are simply rotating their positions — and that, in this landscape, rotating is better than selling out entirely.
Amid "slowing economic growth and slowing profits, investors should really target quality," said Matthew Bartolini, managing director and head of SPDR Americas Research at State Street Global Advisors. "That can provide a little bit of a margin of safety if these microbursts of volatility really extend themselves."
Bartolini, who spoke Wednesday on CNBC's "ETF Edge," said the Federal Reserve's commitment to accommodative monetary policy should provide enough support for the markets for people to stay "broadly" invested. He noted that he's seen ETFs focused on fixed income, government assets and aggregate exposure garner interest in recent weeks.
"I think what this tells us is that investors are willing to stay invested, but move towards more high-quality names with sustainable cash flows and high-quality balance sheets because, typically, in an economic slowdown, those are the types of stocks that tend to outperform," he said. "That really just shows the sophisticated and tactical nature that ETFs can provide for clients that are moving in and out of the market based on the latest information."
Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, said the uncertainty won't last long.
"We at CFRA think we're going to see a bounce back in June. That typically has happened when there's been a sell-off like we've had in May," Rosenbluth said in the same "ETF Edge" interview, adding that "investors have done well rotating during these volatile periods of time instead of hiding in the marketplace."
Moreover, a number of ETFs focused on quality and low volatility have actually seen inflows recently, he noted.
- The iShares Edge MSCI USA Quality Factor ETF, ticker QUAL;
- The Invesco S&P 500 Low Volatility ETF, ticker SPLV;
- And the iShares Edge MSCI Min Vol USA ETF, ticker USMV
For investors looking to rotate now, Rosenbluth had some other recommendations, saying that "dividend strategies are a good place ... to be able to hide in the marketplace, get some income, and ride out some of this volatility that we're likely to have during the summer."
He also noted that the consumer staples and health-care sectors have historically done well when the "sell in May" adage takes hold, flagging a few ETFs investors could use to hedge.
All in all, his recommendations for ETF investors seeking protection in the summer months were:
- The SPDR S&P Dividend ETF, ticker SDY;
- The ProShares S&P 500 Dividend Aristocrats ETF, ticker NOBL;
- The Health Care Select Sector SPDR Fund, ticker XLV;
- And the Vanguard Consumer Staples Index Fund ETF Shares, ticker VDC.
The Dow Jones Industrial Average fell 409 points at Wednesday's low before recovering to finish the day 1% lower. Bond yields and concerns around U.S.-China trade kept a lid on stocks in the session, extending previous losses.