ETF Inflows help bull markets but outflows worsen downturns

ETFs are useful passive investments in a rising market; dangerous when it turns.

From 2004 to the end of January 2018, assets of Exchange Traded Funds (ETFs) and Exchange Traded Products (ETPs) soared from $319 billion to$5,148 billion.

Such has been the bull market that there have been net inflows for 48 consecutive months. Deborah Fuhr, CEO of ETFGI, supplied these numbers on the 25th anniversary of the first ETF. The SPDR S&P 500 ETF Trust (SPY US) had $307 billion at the end of January.  (An ETF is linked to an index of individual stocks. It rises and falls in tandem with the index of either the entire market or sector.)

If markets continue to be volatile and dangerous, ETFGI may well report outflows at the end of February. Anecdotal reports indicate that this is already happening.

Outflows force ETFs to dump stocks, so it is vital that  markets consolidate.  Money poured into ETFs partly because market momentum drove stock prices higher and higher. Even after the recent steep falls, Wall Street’s average PE is  23 and CAPE 30. Those indicators show that the market is still poor value. Perhaps value seekers will now beat momentum players. Sales of ETFs, however, bring down all constituents,  regardless of individual stock value.

More ETF analysis