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ETFs & Markets with Todd Sohn: Skeptical Equity ETF Flows
This week, Strategas ETF Expert Todd Sohn examines the hidden currents of the equity rally, reveals why category flows indicate market uncertainty, and the crucial part international equities play in our intertwined economy.
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Hi everyone, this is Todd Sohn from Strategas Asset Management. I hope you're having a great week.
In this week's video, we're going to update you on high-level flows, a look at our category workbook in terms of what flows are suggesting from here, a long volatility chart that I think is very curious, and an update to our "year three of bull market cycles" chart.
▶️ Watch the video here, or read the transcript below.
So just to hop into it: what’s very interesting is that we came into 2025 averaging about $3 billion per day into equity ETFs. That was historically extreme, right? Coming off of back-to-back 25% years for the S&P 500. Now, we've had a correction — a pretty good washing of aggressive sentiment.
And since the April 8th S&P 500 low, equity ETFs are now averaging only about $1.4 billion per day. So there is a much different posturing today in equity ETF flows than at the start of the year. We think that is supportive in terms of less aggressive sentiment going forward, especially as we've rebounded off the low.
That’s a similar sentiment when you dig a level deeper into our category flows. Since the April 8th low, flows have been led by crypto — which has come back and is gaining steam again in terms of popularity — along with Treasury ETFs, very short-term ETFs in cash and Treasury bills, and also short-duration bonds, not too far out on the curve to take on much duration and interest rate risk.
On the opposite side of this, at the bottom of this chart, note that tech is now closer to the bottom. Last year and in 2023, flows were all-in on tech — that’s widely subsided. You also see cyclical sectors, levered long exposures, and small-cap equity near the bottom.
Put this all together, and it’s a very skeptical picture. Overall flows have slowed down, and more risk-seeking areas are seeing outflows. We think this is very much supportive for the sentiment picture and for assets going forward. For stocks, of course, there are a lot of variables. We’ll see how the entire earnings season shakes out. I’ll show you a year-three chart in just a second. But the flow data is very much supportive and skeptical — which we like.
When you look at cyclicals versus defensives, that ratio hit a new high last week — things like financials and industrials relative to staples and healthcare are at a new high. Yet the flows to cyclical sector ETFs are non-existent. We've seen outflows for cyclicals relative to defensive sectors, too.
More supportive data: once we washed out the market from February to April, the rebound has been met with nerves, skepticism — some negativity, in a sense.
We’ll again see if the market can power through to new highs or spend the summer consolidating. But I would also tell you that positioning remains an asset.
The curious part of all this is that when you look at futures market positioning — this is from the CFTC (there’s a little lag to the data) — if you look at VIX futures positioning from speculators (non-commercial positions is how they're labeled), they’ve been net long for four weeks in a row.
That’s very rare. It’s usually short vol because volatility can be mean-reverting in the long term. And the curious part about this is that it tends to occur either within corrections or near tactical lows.
So I think it's peculiar that they're still long vol even though we've rebounded sharply. This paints a picture of skeptical ETF flows and long vol — I think that’s an interesting setup going forward. It’s also very rare to see that type of positioning. Again, I would echo the word “supportive skepticism,” however you want to label it, for equities going forward.
One side of this to keep in mind is that year three of cycles is often very challenging. They’re sloppy, they’re inconsistent. The average return for year three of bull markets is about 1%.
We’re almost tracking very close to that for 2025. So I just want to be mindful of that — it’s very much a tactical trader’s type of market rather than a trending market, like in years one and two off major lows.
So, while I like what I’m seeing from the flow data in terms of supportive asset-type positioning, I do want to be mindful of what history shows us for year three of bull markets.
Perhaps that February to April correction was the low of the year — we ripped the Band-Aid off and washed out positioning — but there’s still some inconsistency to go this year.
That’s what we have today. I hope this was helpful. Again, flows are much more supportive today than at the start of 2025. But keep in mind it’s still a tricky year overall.
If you have any questions, please feel free to reach out.
Thanks for watching.
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Definitions
- The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
- An exchange-traded fund (ETF) is a pooled investment security that can be bought and sold like an individual stock.
- Fund flows represent the cash that goes into or out of companies, financial assets, sectors, or other market categories.
- Equity ETFs invest in a basket of company stocks (also known as equities or shares). They are the most common type of ETFs.
- A leveraged exchange traded fund (LETF) is a security that uses financial derivatives and debt to amplify the returns of an underlying index or other assets it tracks.
- A bear market is a downward trend in financial markets, indicating a weakening economy and a loss of investor confidence.
- Sector ETFs focus on groups of companies that are pursuing the same type of business, like energy, health care, utilities, or technology, for example.
- A cyclical sector is a type of industry that is sensitive to the business cycle, such that revenues generally are higher in periods of economic prosperity and expansion and are lower in periods of economic downturn and contraction.
- A bull market reflects a price trend in which prices rise for an extended period of time.
- Small cap refers to a company whose market capitalization is considered small, from $250 million to $2 billion.
- Defensive funds, also known as conservative or safe funds, are designed to protect investors' capital and provide stable, reliable returns, especially during market downturns. They prioritize stability and minimize risk, often by investing in assets like bonds, blue-chip stocks, and dividend-paying stocks.
- The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX).
- VIX futures are futures contracts based on the CBOE Volatility Index (VIX), a measure of market expectations of near-term volatility in the S&P 500. They allow traders to take a view on the future value of the VIX, enabling strategies for risk management, alpha generation, and portfolio diversification.
- Speculators are sophisticated investors or traders who purchase assets for short periods of time and employ strategies in order to profit from changes in the price of those assets.
This communication was prepared by Strategas (“we,” “us,” or “our”), a brand that offers investment advisory services through Strategas Asset Management, LLC, an SEC Registered Investment Adviser, and provides research to institutional investors through Strategas Securities, LLC, a broker-dealer and FINRA member firm and an SEC Registered Investment Adviser. This communication represents our views as of 10/08/2024, which are subject to change, and presented for illustrative purposes only. The information contained herein has been obtained from sources we believe to be reliable, but no guarantee of accuracy can be made. This communication is provided for informational purposes only and should not be construed as an offer, recommendation, nor solicitation to buy or sell any specific security, strategy, or investment product. This communication does not constitute, nor should it be regarded as, investment research or a research report or securities recommendation and it does not provide information reasonably sufficient upon which to base an investment decision. This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.
Strategas Asset Management, LLC and Strategas Securities, LLC are affiliated with Robert W. Baird & Co. Incorporated ("Baird"), a broker-dealer and FINRA member firm, and an SEC Registered Investment Adviser, although the firms conduct separate and distinct businesses.
The ETFs described herein are referenced solely for illustrative purposes and should not be construed as an investment recommendation. An investment in exchange traded funds involves risk, including the possible loss of principal. For important disclosures and risks relating to each ETF referenced herein, see each respective funds’ prospectus or contact your financial professional.
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