US equity indexes continue to achieve record highs mid-2017 while European and emerging market ETFs are producing great returns, prompting investors to exit defensive trades in a risk-off environment.
Volatility, as measured by the VIX, has dropped to a record low of 9.81 points – it was 28 points in August 2015 – and ETF investors are exiting defensive sectors like utilities.
But some defensive plays are still producing good returns
PowerShares S&P 500 Low Volatility Portfolio (SPLV) lost more than $600 million between 18 and 24 May. TrackInsight data shows the fund has bled around $79 million cumulatively year to date. Investors are pulling out of the fund despite year-to-date returns of 8.6%.
However, looking at low volatility stocks replicated by 36 ETFs as a whole, TrackInsight data found the sector has not been abandoned, with cumulative flows of more than $300 million since the New Year, despite a barely positive collective return of 0.6%.
A similar story can be seen with the iShares Edge MSCI Min Vol USA ETF (USMV), which has lost cumulative flows of more than $212 million since 1 January. Returns over that timeframe have reached plus 9.2%.
Looking at minimum volatility stocks overall, the sector has seen outflows of $193 million with average returns of 4.5% – a curious disparity between low vol and min vol segments – yet further proof of investors exiting a trade that is producing good results.
Investors also cashed out more than $370 million from the Utilities Select Sector SPDR (XLU) between 18 and 24 May, and withdrew around $130 million during the second quarter from the Consumer Staples Select Sector SPDR (XLP).
The pattern of exiting defensive trades when the VIX falls could “likely result in the conventional thought process rationalising why some investors may be liquidating funds like SPLV in the current market environment, especially if they believe that the VIX, which has traded below $10 this morning [25 May], may be depressed for months on end and that the bull market will continue,” wrote Street One Financial Vice President Paul Weisbruch in a note.
Although minimum volatility and defensive-focused sector funds have seen investor outflows, not all safe havens have seen the same pattern.
SPDR Gold Shares (GLD) – a traditional safe haven in times of volatility – has gathered more than $1 billion year to date while returns have surged to 8.9%.
