An economic indicator: Why fund flows should concern investors (Part 1 of 7)
ETF fund flows are a valuable indicator of what traders are thinking. ETFs respond to changes in demand like any other investment. Understanding what the prevailing investing trends are can help investors decide whether the present time is a good one to invest in any given asset class. While ETF fund flows alone do not determine investor sentiment, they do represent the way most investors participate in the markets. Fund flows can help an investor suggest which ETFs could be next to make a big move higher or lower. In the graph shown here, we have considered the top five ETFs with highest inflow of funds for one month period of January 24, 2014 to February 26, 2014.
ETF fund flows are typically a lagging indicator; which means it points toward the direction of the change in the market after the change has taken place. If the market is recovering after a recession or some other weak period, seeing fund flows grow in stock funds can be a positive indicator, suggesting that investors are increasing their allocations for stocks. When ETF managers have more cash coming in, they should purchase stocks on the open market to keep the portfolio percentages in right proportions. In our next part of the series we will discuss the funds with largest outflows for the past one-month period.
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