Are equity tailwinds just a matter of time?

ETFs have proven their mettle once and for all, says expert, who says trends are consistent with election year

Are equity tailwinds just a matter of time?

The general trend for election year is holding up – with investors loading up on bonds and cash before an expected rebalancing back into equities once the occupancy of the White House is decided. This time around, however, equities have overshot to the downside, with about $500 billion in U.S. outflows since January, while money market inflows have shot to the upside, with a staggering $1.6 trillion of inflows.

Kristy Akullian, CFA, Director, iShares Americas Markets Coverage, BlackRock, said that, for obvious reasons, 3020 is rather different.

“Whether the investor is waiting for the election to be over and has a bit of scar tissue from 2016 in terms of the market not really getting that call right or if they're waiting for the development of a vaccine, it kind of feels like either way, both could be behind us soon. That could be a tailwind for equities.”

Akullian added that BlackRock’s house view is fairly neutral on U.S. equities and that it prefers more of a sectoral or factor-specific approach. Recent equity trends have also shown some rotation from large and mega-cap equities into small cap, reflecting the expectations for further stimulus, while there has also been an uptick into the value factor, positively correlating with the reopening of businesses beaten up by the lockdown.

Akullian added that the market is also starting to position for a Joe Biden election win and even for a potential blue wave outcome. Bond ETFs, meanwhile, have taken in about $200 billion, which is twice as much as into U.S. equities and speaks to the aforementioned election trends and perhaps a desire to buffer against expected election volatility. She believes there is more at play than the election in explaining why equity flows lag fixed income.

“It may actually just be demographic in nature. If you think of this new cohort, the day traders and the retail investors who have been really active in the market so far this year, what we've seen from their investing patterns is that they tend to prefer single stocks. There is a pronounced difference between what we see with the older cohort, who still prefer fund formats.”

COVID-19 has tested individuals and many financial structures. Akullian said that, during February and March, ETFs acted as an effective shock absorber in the market, soaking up a lot of excess trading around the volatility. Investors are now rebalancing, hedging and managing risk with ETFs in the same way Futures do. She said: “This year, in particular, has put to rest some of the narrative that ETFs tend to be more of a retail vehicle than an institutional one.”

ETF trading volumes also rose really sharply, with investors using them in place of other options. This pointed to how important ETFs have become as a risk transfer tool.

“When uncertainty rises, people turn to ETFs and that's precisely because everyone else is turning to them as well,” Akullian said. “It's a way to consolidate liquidity across institutional investors, financial advisors, and retail community, and I think it's that makeup who is trading in the market, meeting [via this] common wrapper, which has been incredibly important.”

Kristy Akullian was speaking during a FTSE Russell webinar.