ETF investors turn to cash and inflation protection in January: Charts of the Week
Big flows into cash funds as interest in tech cools.
Mentioned: iShares Enhanced Cash ETF (ISEC), Vanguard Diversified High Growth ETF (VDHG), BetaShares Global Quality Leaders ETF (QLTY), BetaShares Australia 200 ETF (A200), Global X Management (AUS) Ltd (HGEN), BetaShares Capital Ltd (CRYP), BetaShares Aus High Interest Cash ETF (AAA), iShares Government Inflation ETF (ILB), BetaShares NASDAQ 100 ETF (NDQ), Vanguard Australian Shares ETF (VAS), Vanguard MSCI Intl ETF (VGS)
Investors poured millions into cash and inflation-protected securities in January as Australian and US markets endured their worst selloffs since March 2020.
Cash exchange-traded funds iShares Enhanced Cash ETF (ASX: ISEC) and BetaShares Australian High Interest Cash (ASX: AAA) were the third and fourth most popular funds in January, according to fund flow data tracked by the ASX.
January’s pivot to cash echoes investor behaviour during previous moments of market volatility. Cash funds ballooned with huge inflows during the March quarter in 2020 as coronavirus panic peaked.
Moves to safety follow a torrid January for markets amid soaring inflation, a series of hawkish turns from the world’s major central banks and the looming threat of war in Ukraine. The volatility is unlikely to abate soon, says Sébastien Page, chief investment officer at T. Rowe Price.
“Sustained inflation, a looming Federal Reserve rate hiking cycle, tightening liquidity conditions, and the unwinding of pandemic era economic distortions—among other factors—mean that further price fluctuations can be expected,” he says.
The Cboe’s Volatility Index, also known as Wall Street’s fear gauge, rose 49.5% in January. The tech-heavy Nasdaq Composite index fell 10% in January, while the local benchmark S&P/ASX 200 declined 8.1%.
Many investors appear to be opting for the sidelines. Flows into the entire ETF sector halved between December and January, sitting 40% below the average set through 2021.
Interest in technology stocks waned amid double digit declines at Netflix and Facebook owner Meta Platforms. Flows into the BetaShares Nasdaq 100 ETF (ASX: NDQ) slumped to just $13 million, a fifth of its 2021 average.
The shift into cash dwarfed movements into some of the most popular equity ETFs. At just over $200 million, flows into the iShares and BetaShares cash funds were twice what investors put into the $4.7 billion Vanguard MSCI Index International Shares ETF (ASX: VGS), and nearly quadruple investor contributions to Australia’s largest multi-asset ETF, Vanguard Diversified High Growth (ASX: VDHG).
Two thirds of poll respondents at the Morningstar Investment Conference - Individual Investor in February said they thought the stock market was in bubble territory.
Interest in inflation protection funds also hit a record in January. The iShares Government Inflation ETF saw inflows of $56 million, more than half the $92 recorded across all of 2021. The ETF invests in inflation-linked Australian fixed income securities.
The pivot into inflation protection came as Australian inflation hit its highest level since 2011 in December.
Returns from inflation-linked securities have disappointed to date and the iShares Government Inflation ETF was down 1.35% for January and 3.8% year to date. Poor performance may reflect investors betting central banks will contain inflation, highlighting the difficulties of timing the market.
Equities retain crown
Australian investors continued to add money to positions in some of the largest and most popular equity exchange-traded funds amid the market turmoil.
The BetaShares Australia 200 (ASX: A200), Vanguard Australian Shares Index ETF (ASX: VAS) and Vanguard MSCI Index International saw the most inflows in January.
Global equity funds retained their crown as the most popular category. Trouble overseas saw Australian equities close the gap, with inflows to the tune of $229 million versus $271 million for the global equity fund category.
Over the course of 2021, flows into international equity funds were more than double those into the Australian equity category.
January also saw rising interest for higher quality equities. Inflows to the BetaShares Global Quality Leaders ETF (ASX: QLTY) were equal to half the 2021 total. The fund prioritises companies with strong cash flows, low debt and high returns to equity.
Flows to some of the most speculative vehicles on the ASX stayed positive as they slowed amid heavy losses. Investors added $10 million to the BetaShares Crypto Innovators ETF (ASX: CRYP) and $0.8 million to the ETFS Hydrogen ETF (ASX: HGEN).
The funds were the first and third worst performing ETF in January, with losses of 30.6% and 22.8%, respectively, according to ASX data.
Managed funds were among those to experience the biggest outflows, with net outflows between $40 million and $121 million at active ETFs from Switzer, Antipodes and Magellan.