ETFs & Markets: Gauging Excess, Volatility, and Flows in Year Three of the Bull Run

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So just a reminder it is year three of a bull market. There's a lot of headlines going on here, a lot of noise depending on where, where you're looking, whether it's tariff related, AI competitor related and whatnot.

But just going back to the data here, this chart shows you year three is often very inconsistent. There's a wide dispersion of returns. And so far, that's playing out to script. I think this is a helpful roadmap for the rest of the year that, once you get to the third year of the bull market, it's not much, it's not very similar to what, year one and year two offered in terms of linear returns to the upside.

So just keep that in mind. Expect more volatility and inconsistency across the board.

A ratio I do want to keep an eye on though is to, to help examine, if we are in a deeper correction or not, is the ratio of levered long to inverse ETF assets under management? These are just basically bets against conviction of stocks one higher or conviction of stocks going lower.

And the ratio this right now is 12 to 1 in favor of levered long products. That is an effect of a bull market that's been going up for two and a half years. But when the ratio is at 12 to 1, that's the highest in the data that we have over the last 15 years. So there's a little bit excessive.

I would look for this to compress over time, and perhaps get bounced back down to the, 2 to 1 or 1 to 1 area, especially if stocks do continue to correct. That would be a helpful barometer along with some of the other indicators we watch, such as volume into inverse products, volume to cash like ETFs, flows there as well. To help you know when the coast has cleared up just a little bit.

As for monthly flows, equity tips did almost 50 billion in January.

That's the second-best January we have in our data set, though it is a break from the back-to-back $100 billion month you saw in November December last year. That's okay. Some cooling is helpful to, to have sentiment ultimately, take a couple of weeks off here.

The more importantly, I do find the $38 billion in the fixed income ETFs as a stand out. That is almost a record for the month.

Clearly, investors pretty happy, especially on the short end of the curve with four and a half, roughly 4.5% yields, 4.2% yields pay on a product. You're looking at. And the embracement of fixed income ETFs just continues.

So, we expect to see more and more flows to fixed income ETFs, especially as products explode. And I think the big picture, you're seeing this reflected in the type of vehicles that investors are using.

It was the third year in a row at fixed income ETFs, saw larger inflows than fixed income mutual funds. And so this is a chart that goes back to the early 1980s.

ETFs did not exist back then. But what stands out is if you took the cumulative spread of flows to fixed income mutual funds versus ETFs, that peaked at about 2 trillion in favor of mutual funds back in 2020 and has been cut in half. So the total amount of flows to fixed income mutual funds is at about 2 trillion.

While ETFs are quickly closing the gap, there and they're going to sooner not become, I think, the favored investing vehicle for, that portion of a portfolio. So, the evolution of the way we invest continues, and this like the way this line is going vertical certainly reflects that. So that's what we have today. I hope this was helpful.

And stay patient. Remember year three is inconsistent and we want to keep an eye on how these leveraged products are being traded.

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