Overtime

ETF Flows

Good morning,

This week we’re checking in on ETF flows.

ETFs have become some of the most popular trading tools around, providing unique insight into market sentiment. From a sentiment perspective, I believe they are far better than survey data because they indicate what people are actually doing with their money vs. what they say they are doing.

Like sentiment survey data, ETF flows are most significant at extremes and it’s important to always view them from a contrarian lens.

This week we’ll categorize some popular ETFs that fall into 3 main categories:

• Overly aggressive. These ETFs have seen extreme inflows. For an uptrend, I don’t believe that alone is a reason to sell but it’s a yellow flag and could indicate more downside vulnerability in a correction.

• Contrarian positive. These ETFs have seen significant outflows recently and extreme readings could indicate selling is unlikely to continue to the same degree. Potential tailwind if a downtrend can stabilize and a bullish indicator for uptrends.

• Apathetic. Flows here aren’t extreme in either direction but that means there could be room to run for the underlying trend.

All the charts below are courtesy of Koyfin and show the rolling 3-month flows over the past 5 years.

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ETFs seeing aggressive inflows

Semiconductors

SMH, the VanEck Semiconductor ETF has taken in a whopping $3.3B over the past 3 months. That isn’t as extreme as the reading last summer (just before the fall correction I would add) but does indicate investors are all in on an ETF that peaked a month ago.

Home Construction

ITB, the iShares US Home Construction ETF has taken in nearly half a billion over the trailing 3 months. This didn’t mark a top coming off the Covid bottom but is almost the exact same level as the January 2022 peak and last summer’s peak just before the fall correction. Note how aggressive the outflows were in the spring of 2022, just before the fund bottomed.

Japan

Japan has mostly been ignored by investors for years but the 34-year breakout of the Nikkei seems to have alerted some to the technical strength. EWJ, the iShares MSCI Japan ETF has taken in $1.8 billion over the past 3 months. Similar readings have consistently marked at least short-term tops over the past 5 years.

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Contrarian positive