ETFs & Markets with Todd Sohn: Reading the Risk-Off Signals in ETF Flows

Now that we are about two months past the S&P 500 peak closing price, we're going to look at flows, where this decline stands relative to history, and a couple of outliers in terms of some other asset classes.

So just to give you some context on where this decline looks compared to historic S&P 500 declines: about 19% peak to trough.

We've bounced a little bit since the early April low point. But if we're going to get worse from here, there's plenty of historical examples of where the magnitude and duration of declines have gone on for longer. So, yes, painful, but we are nowhere near any sort of historical extremes. I think if you are going to enter into one of those more challenging environments, keep an eye on credit conditions.

Spreads have widened. We've seen outflows from credit-sensitive ETFs, which we'll talk about in a second. But credit conditions will likely be the tell on if the 19% was it, we just chop around here for the summer, or if we're entering some sort of more crisis-like environment—like a tech bubble, like the financial crisis, or something back in the ‘70s when inflation was a big problem.

As for flows since the peak two months ago, starting on the outflow side, you've had money out of economically sensitive areas—cyclical sectors such as financials, industrials, small caps, and even bitcoin.

And also, credit- and loan-related products like CLOs and high yield, which is curious to me given that they were such a solid low-vol addition for portfolios.

That's changing at this point in the cycle. And conversely, on the inflow side, you see a massive amount of money going to Treasury bill ETFs, right? Cash is really the safest thing in the environment. You're still getting 4% yield on that.

And as well as gold, which we'll touch on in just a second. But both of those scream defensive, risk-off type activity to me. I think that's actually supportive in a sense that we are getting through this correction, and sentiment via these flows is very pessimistic.

And just to add to that, you've only had inflows to the utility sector out of all the sectors out there. So ten out of eleven sectors have seen outflows. There's no conviction out there outside of buying utilities, which can be much more traditionally defensive in this type of environment.

And I would just point out energy, financials, industrials, and materials at the bottom of this list. Financials had a pretty good sugar high post the election last year, now seeing that trade reverse. And energy we do count among defensive sectors, arguably because of the yield in the inflationary environment. But there's just no love there at all.

And here is our aggregate of cyclical sector flows over the last one and three months.

You've had a pretty good purge. That's a much different backdrop than late 2024. So it is painful. It is a different risk tone than we have seen in the last year and a half to two years, but again, reflective of sentiment moving in the right direction. So, perhaps we're not there yet, but maybe in the ballpark of trying to find some sort of low going forward.

And that'll be a good reset given the rinsing from sentiment that we have.

And then lastly, on gold: we have gold prices going parabolic. You're trading three standard deviations above a one-year average, and you have gold flows going parabolic.

So you're seeing allocations across the gold ETF spectrum really accelerating. That’s going to be the products that are highly liquid, the most traded gold ETFs along with the more—what I would call—advisor-friendly, which tend to be low-cost but still tracking gold. Flows are going there. And it wasn't lost on us as well that we had some issuers touting gold assets under management in their ETFs too, as the price resurged. So, flows sentiment getting hot, price sentiment getting hot, and anecdotal sentiment getting hot.

We would just be perhaps a little bit careful chasing gold here in the near term, even though it has been a good portfolio diversifier. So that’s what we have today. Again, flows are very economically sensitive. Risk-off while you're seeing more defensive areas—such as Treasury bills and gold—see inflows sharply rise. And so it supports the sentiment backdrop overall.

But we're yet to get through this correction just yet. Stay patient. And we’ll be looking for further signs of credit stabilizing and perhaps some internal improvement underneath the surface as we try to retest the early April lows. Let us know if you have any questions. And thanks for watching.

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