Money chases performance. Or at least, that's how it used to be on Wall Street. ETF pro Nick Colas, the chief market strategist at ConvergEx Group, recently crunched some numbers on ETF performance versus fund flows, and the results are truly surprising.
Colas uses data compiled from Exchange Traded Funds and Exchange Traded Products — ETFs and ETPs — that have three-year track records. Why three years? That's how long it takes, according to his research, to prove your staying power and gain the attention of the "serious money." Basically, after a decent three-year track record, you've earned street cred.
According to ETF database www.xtf.com, 778 of the 1,486 U.S.-listed ETFs & ETPs have existing for over three years. The median three-year return is 35.6%. Of course, there's a wide discrepancy between the top and bottom performers, but the money flows in and out couldn't be more counterintuitive.
"I fully expected that the old adage on Wall Street that money will chase performance to be in place here, and it was just the opposite," says Colas. "The names that did the best didn't have very much in terms of new flows, the names that did the worst had tremendously strong flows."
Based on the average three-year performance, the top 30 products returned 142% with fund flows + $5.6 billion. The bottom 30 products returned -83% with fund flows + $14.3 billion over the 36-month period.
"The money flows are strongly towards these downside names," he reiterates. Here's a look at the top and bottom performers along with their 3-year return and fund flows:
Direxion Daily Real Estate Bull 3x Shares (DRN) 468% -$47M
ProShares Ultra Real Estate (URE) 232% -$661M
Direxion Daily Tech Bull 3x Shares (TECL) 216% -$94M
Direxion Daily Real Estate Bear 3x Shares (DRV) -98% +$170M
ProShares UltraShort Silver (ZSL) -96% +$404M
iPath S&P 500 VIX Short-Term Futures (VXX) -95% +$4.8B
"When we look at the top 30 and bottom 30 we get a lot of leveraged ETFs, the doubles and the triples," says Colas. "And folks buy the doubles and triples because they're worried about downside scenarios. So they'll buy the bearish doubles, the bearish triples, and that's why those names continue to have relevance even though their absolute performance over three years is very poor, down 85 to 90%."
That is pretty clear evidence that the money is chasing losers. So what can we all learn?
Colas says the first lesson is to do your homework. If you get a tip about an ETF, take the time to learn what it's really all about -- Does it track an index? Does it track commodities prices? Is it leveraged?
"The second [lesson] is look at how much money is still going into negatively oriented ETFs," he says. "It's a real signal and a real sense that investors are still worried about the market, even three years into a bull market rally, we're still worried about what might happen."
Perhaps we can use it as a lesson to stay away from leveraged ETFs? Let us know if you agree on our Facebook page.