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Impeachment Jitters Seen In ETF Flows

Cinthia Murphy

Everyone wants to know what the impeachment inquiry against President Trump will mean to markets and investor portfolios. You could say it will lead to more uncertainty ahead—more volatility—but beyond that, it’s anyone’s guess.

Financial market coverage Wednesday, the day after the U.S. House of Representatives kicked off the inquiry, grasped for clues from the two previous impeachment attempts in U.S. history.

In times like this, historical precedence can offer some guidance to those trying to guess the market’s next turn, as it’s said that history has a tendency to repeat itself.

2 Impeachments, 2 Different Market Reactions

But this time around, Steve Goldstein at MarketWatch pointed out, history isn’t offering a whole lot of clues. Markets behaved very differently during the previous two impeachment attempts. Goldstein reported:

“During Nixon’s Watergate, for instance, the S&P 500 dropped 20% in the six months before he resigned, and gold shot up 15%. It’s worth noting, however, that the decline also coincided with the first OPEC oil embargo that sent gasoline prices soaring and tipped the economy into recession. By contrast, the Clinton impeachment was almost a non-event, with the S&P 500 rallying 10% in the two months before his acquittal in February 1999.”

Plenty To Be Defensive About

Impeachment proceedings are also just the latest drop in a fairly full bucket of concerning factors driving markets this year. Those include the concerns about a global economic slowdown and a possible recession in the U.S., the ongoing trade war with China, troubles with Iran, increasingly accommodative central banks, including the Federal Reserve, lofty valuations, Brexit—the list goes on.

It could be that investors rush to play defense, as they have for much of the year. In the ETF space, U.S. fixed income funds have attracted roughly the same amount of assets as U.S. equity ETFs in 2019—about $92 billion for each asset class this year.

Some of the most popular defense-flavor favorites could continue to gather traction if investors grow jittery, such as gold and bond ETFs, low volatility and value stocks, and income-oriented equity sectors such as utilities.

Clues In Asset Flows

Recent asset flows would suggest as much. As a good gauge of investor sentiment, if a laggard one, asset flows show that investors have flocked to defensive strategies in the past week.

The SPDR Gold Trust (GLD) raked in $1.3 billion in net creations in five days, leading the top creations charts. Year to date, gold prices are up about 17%, and GLD has now taken in more than $5.8 billion in fresh net assets this year.

On the fixed income front, Treasury funds such as the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 3-7 Year Treasury Bond ETF (IEI) were also in demand during the past week, attracting nearly $600 million each.

And the iShares Edge MSCI Min Vol U.S.A. ETF (USMV), one of the most popular ETFs this year, picked up $460 million in the week, bringing its year-to-date haul to a whopping $10.7 billion.

Playing Defense

Also finding fresh demand was the Utilities Select Sector SPDR Fund (XLU), which saw net inflows of about $150 million as utilities emerged as one of only two S&P 500 sectors in the black in the past week.

Many see utilities as a defensive equity sector. XLU, which invests in 29 utilities companies from the S&P 500, has a yield of 2.9%, which compares to 1.7% that the 10-year Treasuries currently offer, and the 2.1% yield of a 30-year Treasury.

By contrast, the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO)—S&P 500 ETFs that tend to attract long-term investors with sticky assets—bled $900 million and $450 million, respectively, in a week.

Year to date, some of these defensive strategies such as USMV and XLU have been outperforming the broader market, measured here by IVV. GLD is not that far behind:

 

Chart courtesy of StockCharts.com

 

It could be this impeachment process proves nothing more than “a huge distraction” to markets, as Dan Kern, chief investment officer at Boston-based TFC Financial Management, told the Boston Globe Wednesday.

Many pundits have argued throughout the day that a Senate approval on a potential impeachment vote would be unlikely. And as the day progressed, U.S. markets seemed to agree, as most major U.S. equity benchmarks shook off earlier-day losses and moved into the green. It remains to be seen how much of a “distraction” this inquiry will be.

Contact Cinthia Murphy at cmurphy@etf.com

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