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Recession Fears Shift ETF Flows

Lara Crigger

As the domestic and global economies alike flash recessionary signals, investors have been prepping their portfolios accordingly.

Over the past month, three of the top 10 highest outflow ETFs have been corporate bond ETFs, including the iShares iBoxx USD High Yield Corporate Bond ETF (HYG), the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT).

For the period July 12 to Aug. 12, HYG, LQD and VCIT have seen outflows of $1.39 billion, $1.38 billion and $949 million, respectively.

Corporate Earnings Recession Dulls HYG, LQD

On its face, those outflows may seem counterintuitive. One might expect that, as Treasury yields fall and interest rates drop, investors gravitate toward higher-yielding instruments, such as corporate bonds, to provide a cushion of income.

But corporate bonds also carry higher credit risk than government issues like Treasuries. Most corporate bonds are unsecured by any collateral; instead, they're backed by the company's ability to pay down the debt with future earnings. And unfortunately, that earnings picture isn't looking so hot right now.

Last Friday, MarketWatch reported that corporate earnings for the companies in the S&P 500 Index had grown at a negative rate for the second quarter in a row. The sectors hit with the biggest growth declines were materials and industrials—or the market segments most exposed to the Trump administration's continued tariffs on Chinese goods.

Furthermore, estimates for next quarter's growth remain negative, at -3.31%. That would be three consecutive quarters of negative earnings growth.

One can quibble about whether a recession begins after three quarters of negative growth or just two, but either way, the news isn't good. If companies are making less money in the future, they'll have less cash on hand to pay down their debt—sparking concerns of default. No wonder investors are fleeing the big corporate bond ETFs.

Safer ETFs See Inflows

While all this is going on in fixed income land, investors have also begun pouring their money into instruments perceived as "safe"—or safer, in any case.

Over the past 30 days, the SPDR Gold Trust (GLD) has seen inflows of $2.18 billion. Gold is considered a safe-haven asset that preserves value even in times of market turmoil and stress.

The consumer staples sector, which historically has performed well in recessionary times, has also seen strong net inflows. The Consumer Staples Select Sector SPDR Fund (XLP) has grown by $801 million over the past month.

Meanwhile, the iShares Edge MSCI Min Vol U.S.A. ETF (USMV), a factor ETF designed to provide market exposure at the absolute lowest volatility possible, has seen inflows of $1.96 billion (read: "ETF Of The Week: This Min Vol Fund On A Roll").

As recessionary fears mount, market observers can expect to continue to see large inflows into these and other "safer" assets, such as the Utilities Select Sector SPDR Fund (XLU), which drew $662 million on Tuesday alone (read: "Safe Haven 'XLU' Tops Inflows List").

Contact Lara Crigger at lcrigger@etf.com

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