NEW YORK, April 21 (Reuters) - Investors looking to time market swings should consider using money flows into exchange traded funds as a contrary indicator, according to a report from TrimTabs Investment Research released on Wednesday.
TrimTabs found that ETF investors are particularly poor market timers. Comparing money flows into equity ETFs and future returns on the benchmark S&P 500 .SPX shows a strong negative correlation, regardless of time period or the direction of the bet.
“Stock prices fall after equity ETFs rake in huge sums of money, and they rise after ETFs post heavy outflows,” said Vincent Deluard, global equity strategist at TrimTabs, in a release. “Simply put, ETF investors are impressively wrong in both directions.”
Exchange traded funds track an index, commodity or basket of assets and trade like a stock. Providing easy diversification, ETFs have gained in popularity. While timing the market is not necessarily the goal of these investors, those taking long positions will be looking for the underlying asset to rise in value.
TrimTabs found that monthly equity ETF flows and returns on the S&P 500 one month later had a negative correlation of 21.4 percent. Over a two-month period, the negative correlation rises to 45.6 percent and 52.4 percent for three months.
It is not unusual to see a strong correlation between simultaneous flows and returns as investors often chase gains. But the negative correlation between flows and future returns suggests flow data can be used as a contrary leading indicator, said TrimTabs.
The research service suggested two reasons:
Firstly, that ETFs are primarily used by retail investors who may be less informed than institutional players.
Secondly, TrimTabs wrote they suspect hedge funds switch to equity ETFs when liquidity in the broader market dries up. Equity ETFs took in a record $111 billion between September and December 2008 when hedge funds were unwinding individual positions. Conversely, ETFs lost $29.7 billion between January and April last year when markets returned to normal, it said. (Reporting by Leah Schnurr)