February 28, 2020

Investors Flee Equity ETFs due to the Coronavirus Scare

by Pat Keon, CFA.

Equity ETFs suffered their fifth worst one-week net outflow in history (Lipper began tracking equity ETF flows data in 1996) as the group had $17.8 billion leave its coffers for the fund-flows trading week ended Wednesday, February 26. As the perceived threat from the coronavirus has grown over the last week, the major U.S. equity indices have been in a race to the bottom, and equity ETFs flows have followed in kind. In just six trading sessions since the indices all closed up in trading for Wednesday, February 19, the NASDAQ Composite Index, S&P 500 Index, and Dow Jones Industrial Average closed Thursday, February 27, in correction territory—all with losses of greater than 12.0% since February 19.

The markets have reacted so negatively because of the potential harmful impact that the coronavirus could have on global economic growth. Specifically, the current concerns rest with the two largest economic engines in the world, the U.S. and China. China, the source of the outbreak, has already seen its growth reduced due to the mass quarantines that it had to enact to curtail the spread of the virus. The quarantines have led to factories being shuttered, as well as a downturn in investment. While the U.S. has not had a significant number of coronavirus cases yet, it has already been speculated that a more robust outbreak could lead to a recession. This assertion was made by Janet Yellen, former Federal Reserve Chairwoman, during a speech she gave this week. As speculation about a potential recession has grown, so has the possibility that the Fed may need to act quickly with interest rate cuts.

The lion’s share of the net negative flows for equity ETFs are tied directly to the coronavirus threat. The week’s most significant net outflows belonged to an ETF which tracks the U.S. large-cap market, as SPDR S&P 500 ETF (SPY) shed $14.5 billion of its assets. The next two largest net outflows came from ETFs which are facing a more immediate impact from the virus than the U.S. product. iShares MSCI Emerging Markets ETF (EEM), which has over 50% of its assets invested in China region stocks, had net outflows of $1.1 billion for the week. In addition, iShares MSCI Japan ETF (EWJ) had negative net outflows of $790 million for the week. After receiving criticism for slow-walking their response to the virus, the Japanese government has recently asked public schools to close for a month in effort to contain the outbreak.

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