Money is pouring into stocks through exchange-traded funds.
You can thank the potential vaccines. Money is pouring in
because U.S. investors who have been reluctant to put money into equities are
now stampeding into stocks on the belief that that the “Covid winter” of 2020
will be followed by the “Reopening spring” of 2021, and many are choosing ETFs
as that investment vehicle.
The Exchange Traded Fund (ETF) industry in the U.S.
surpassed $5 trillion in assets under management last week, a new record.
Record highs for stocks was a big help, but over $400 billion in new money has
poured into ETFs this year, only the second time it has passed $400 billion in
a single year. By comparison, inflows stood at $246.6 billion at this same
point last year, according to ETF.com.
Heavy inflows into stocks in November
Inflows into plain-vanilla equity ETFs like the S&P 500
(SPY), Vanguard Total Stock Market (VTI), and the Russell 2000 (IWM) have been
particularly strong this month.
Equity ETF inflows (November)
SPDR S&P 500 (SPY): $15.1 billion
Vanguard Total Stock Market (VTI): $2.8 billion
iShares Russell 2000 (IWM): $1.6 billion
Investors believe earnings are too low for 2021
Animating the strong inflows into stocks: A belief that
earnings for market leaders like technology will stay strong in 2021 but
that beaten-up sectors like energy,
banks, and industrials will also see a 2021 rebound that brings earnings back
to 2019 levels — and beyond. Earnings
estimates for the S&P 500 are expected to be down 16% this year but are
expected to rebound in 2021 to levels slightly above the 2019 historic highs:
S&P 500 earnings
2019: $163
2020 (est): $137
2021 (est.): $168
Many — like Mike Wilson from Morgan Stanley — believe that
these estimates are way too low, just as they have been through most of 2020.
“We have higher estimates for next year,” he told CNBC’s
“Closing Bell.” “We’re around $175 for the S&P 500, we have a $183 bull
case, so I think we’re probably leaning toward that bull case with these
vaccines getting out there faster than maybe we were expecting, so $180 in
earnings power next year is a big number,” he said.
Outflows from bonds and gold
At the same time, there have been outflows from Treasury
bond funds and gold ETFs.
Treasury/Gold outflows (November)
iShares 20+ Treasury (TLT): $1.4 billion
SPDR Gold Trust (GLD): $1.4 billion
iShares 7-10 Year (IEF): $1.3 billion
“People are moving away from safe harbor sectors [bonds] and
into equities,” Doug Yones, head of exchange-traded products at the New York
Stock Exchange, told me.
Jan van Eck of, CEO of VanEck Associates, was even more forceful. He said that after
years of putting money into bonds, bond investors may finally start looking for
the exits: “The forty percent of your
portfolio that is supposed to be in bonds is broken,” he told CNBC’s “ETF
Edge.” “No one wants to own bonds with
rates this low.”
Many may be fleeing bond funds, but it’s a relatively recent
phenomenon. Bonds have been enjoying inflows for a number of years and still
have healthy inflows for the full year.
Inflows in 2020
Fixed Income: $181.9 billion
Equity: $167 billion
Gold: $33 billion
ETFs keep winning
One thing’s clear — ETFs are becoming the preferred way to
move money into — and out of — the markets.
Mutual funds are still a $21 trillion business, versus $5 trillion for
ETFs, but there’s little doubt ETFs are on the way to $10 trillion in assets
under management in the next several years.
“I think we could easily add another trillion or two [going
into 2021],” Yones told me.
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