Surge In Index ETF Assets

In yesterday's report, we noted that index ETFs had seen a sudden surge. Both SPY and DIA took in the most money of the year. On Wednesday, QQQ joined that list with a $1.7 billion inflow.

The usual caveat is that fund flows are not necessarily a reflection of buying interest. Some of the shares created could be due to demand from short sellers, which would not be a contrary indicator. But that is more of an issue with lower-liquidity funds, especially commodity-related ones.

Just looking at raw fund flows is useful, but can be misleading because there's not a lot of context. The usual remedy is to compare the flow to underlying assets. We can also look at the flow relative to its history, say over the past year.

Let's look at the flow into and out of SPY, DIA, QQQ, and IWM and compare each day's reading with its average and standard deviation over the past year to come up with a z-score. We'll then average that score for the four funds.

The result is shown below.

We can see that it just jumped above 2 standard deviations for one of the few times in the past few years.

To see if that's had any impact on future returns, the following table shows dates when the average z-score climbed above 2, and SPY was within 2% of a 52-week high at the time.

Results were a bit weak, especially over the shorter-term. The S&P's average risk was twice as large as its average reward.

There were only three other times it occurred when SPY was within 1% of a 52-week high (2007-02-01, 2011-04-29, and 2014-12-22), and all led to declines of more than -1% in SPY over the next month.