Investors Pull $8 Billion from S&P 500 ETF Despite Dow Record

ETF Trends

Investors have pulled over $8 billion so far in 2013 from the largest ETF in the land, SPDR S&P 500 (SPY) , despite the Dow Jones Industrial Average rising to a new all-time high this week.

The outflows are notable but could simply reflect a rotation among large individual investors who often use the S&P 500 ETF to park cash on a short-term basis. For example, Vanguard S&P 500 ETF (VOO) has experienced net inflows of $1.4 billion year to date, according to IndexUniverse data.

Yet despite the SPDR Dow Jones Industrial Average ETF (DIA) hitting a new record, fund flows and trading volume elsewhere are still indicating that many investors remain shy to get back into the stock  market. [Dow Clears All-Time High]

“In the past, stock indexes have often drifted lower in the months after breaking through previous record highs,” the Associated Press reports.

WSJ.com’s MarketBeat blog notes that investors have been mistrustful of the market rally since the financial crisis, judging by dwindling fund flows and trading volume. “Only recently has the retail investor started coming back to stocks, although the worry is with the market at record highs, the little guy could potentially be ‘buying high,’” it says. [ETFs See the Best Two-Month Start Ever]

Another point that proves investors are still stock market shy is the lack of trading volume. Overall trading volume has been trending lower. As the stock market is healing and flirting with new highs, investors are ultimately lacking any confidence in the rally continuing.

Investors are dissuaded by the tech bubble in the 1990s, the 2008 housing bubble bust, the May 2010 flash crash in the stock market and the recent IPO flops have not helped to gain the trust of retail investors.

Still, some analysts point out that less-than-buoyant sentiment means that there is a lot of sideline money in cash and bonds that could potentially join the rally and push stocks higher. Also, U.S. stock valuations are about average based on historical price-to-earnings ratios. In other words, the market isn’t wildly overpriced or expensive. [Dividends, Inflation Put Dow Record in Context]

In fact, Richard Bernstein, chief executive of Richard Bernstein Advisors, makes the case that the current situation in stocks is reminiscent of the early 1980s, the opening phase of a secular bull market. “We have thought for some time that the current bull market might be one of the strongest of our careers, and could potentially rival the 1980s bull market,” Bernstein said in a MarketBeat post. He tracks three indicators that suggest a bear market is looming – a Fed that tightens too much, a market that’s too overvalued and an investor mindset that’s too euphoric. “None of those three signs are evident today,” he said in the MarketBeat report.

The Dow’s new nominal high is largely a psychological milestone “but it’s one that might convince investors the economy is actually recovering from the massacre of 2008-09,” reports Teresa Dixon Murray for the Plain Dealer.

“Psychologically, this is a good thing,” said Sanjay Bhargava, president of JK Investment Group, in the article. “What’s happening is that a lot of clients are seeing their portfolios come back to where they were in 2007. People are finally tippy-toeing back in.”

However, he cautions that investors who want to get back into the market may have already missed the bulk of the rally from the 2009 low. “For people who have been on the sidelines, I don’t know whether I would invest a lot now at these prices,” Bhargava said in the story.

Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon’s clients own SPY.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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