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Appetite for Destruction


CFA, Senior Research Analyst

Recently, Ed Clissold and Pat Tschosik asked “Is the S&P 500 COVID-proof?” They examined the companies and subindustries of the S&P 500 and identified leaders and laggards during the epidemic. In a similar vein, we used ETFs to quantify investor gains and losses in different assets, styles, and themes.

We used a simple framework to calculate the dollar amount created or destroyed by an individual fund during the period from the S&P 500’s all-time high on February 19, 2020 through last Friday, May 15th, 2020 (below). To start, we calculated the change in the fund’s market-cap (AUM) over that period. We then subtracted the aggregate flows to the fund over that same period. If the result was positive, value was created. If the result was negative, value was destroyed. Generally, the larger the fund’s AUM, the larger the creation or destruction of the dollar amount. To normalize among funds of different sizes, we divided the result by the initial (February 19th) AUM. The full list is on the last page.

S&P 500 decline and revoery

We excluded levered and inverse funds and funds with a creation date after January 1, 2020. We also made the simplifying assumption that the market price is equivalent to the NAV. It is true that some bond ETFs traded at significant discounts to NAV at the zenith of the market decline but, for the most part, we believe arbitrage implemented by authorized participants functions as intended and keeps prices in-line with NAVs. We’ll leave the debate over whether the bond ETF’s market price or NAV reflected the “correct” price for another time.

Welcome to the jungle

It should come as no surprise that most ETFs did not create value during the sharp sell-off and subsequent rally since the market’s all-time high. Over 95% of equity ETFs, 75% of bond ETFs, and 71% of commodity ETFs destroyed value.

The three largest S&P 500 funds (SPY, IVV and VOO) combined to wipe-out over $100 billion of investor capital. It is interesting to note that while both SPY and IVV experienced aggregate outflows, Vanguard’s VOO raked in almost seven billion dollars, possibly reflecting a different investment approach of Vanguard’s captive investor base. Even the Q’s (QQQ), with a heavy weighting to COVID leaders (FB, AMZN, NFLX, MSFT, AAPL GOOG) and relative outperformance, couldn’t escape wiping out five billion dollars of investor capital.

Whipping post

Within equities, only 15% of funds with Growth as a stated style created value. Zero Value funds created value. Less than 5% of funds with a stated cap of Large and 2% of Small-cap funds created value. For the S&P 500 sectors, we looked at the Sector SPDR funds and VNQ for Real Estate. None of the sector funds added value. XLE, XLU, XLP, XLC, XLB, and XLV all had positive aggregate flows — with XLV raking in over six billion dollars as investors positioned for a potential COVID-19 cure (below).

Coronavirus testing cure by category relative performance

All that glitters is gold

On the value-creation side, gold-related funds led the way in absolute terms. GLD, GDX, and IAU together created over eight billion dollars, GLD had the 2nd largest aggregate flow of funds evaluated with just over $10 billion.

gold in long term uptrend

With a little help from my friends

Presumed Fed darling LQD had the third largest aggregate inflow with over nine billion new investor dollars going to the fund. Most of the inflows occurred after the announcement on March 23rd that investment grade bond ETFs may be included as part of the purchases in the Fed’s Secondary Market Corporate Credit Facility. TLT, IEF (treasury bonds), and AGG (aggregate bond) were the largest bond value creators and together created over five billion dollars of new wealth.

Take the money and run

As realized volatility across asset classes rose to levels not seen since the Great Financial Crisis, implied volatilities rose at a pace that even surprised many long volatility investors (below).

implied volatilities of the market asset classes

VXX, the largest “long-vol” fund, started the period with a little over one billion dollars. Investors redeemed $1.6 billion to take profits during the period, and the fund still managed to end with over $600 million AUM (below).

VXX investors cash out

Free fallin’

The lure of the sharp drop in the price of oil was too great for some investors to heed the red flag warnings from the largest futures-based commodity ETF in the energy space. USO deviated from its stated investment objective, as the front month contract of the crude benchmark — WTI — traded below zero. Shortly thereafter, the fund announced a one-for-eight reverse split. Yet, investors poured almost $5.5 billion of new money into the fund. Its end-of-period AUM was only $2.5 billion higher than the start of the period (below).

falling prices draws in new money

The most staggering destruction on a percentage basis came from JETS, an ETF that tracks the airline industry. Normally, falling oil prices should benefit airlines but travel bans and stay-at-home orders crippled the industry. Even Warren Buffet tossed in the towel. At the February market peak, JETS’ AUM was a relatively paltry $43 million. Over the course of the next 12 weeks, the fund took in $731 million of new money (below).

Buying what Warren Buffet sold

By May 15, JETS’ AUM was $600 million meaning over $170 million of capital, or four times its initial AUM, was torched.

The crisis is not over. World economies are gradually reopening. Maybe the old trader’s adage “not wrong, just early” will work out for those blindly buying weakness.

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