Investors Flee Risky Corporate Debt Amid Rout

Investors Flee Risky Corporate Debt Amid Rout


S&P 500 Outlook:

S&P 500 Outlook: Investors Flee Risky Corporate Debt Amid Rout

The risk appetite of investors is waning as the S&P 500 and Dow Jones continue to slide. On Wednesday, the HYG ETF – which grants exposure to high yield corporate debt – registered its largest daily net outflow in 2019. The outflows effectively double down on the same theme that has sparked an unwillingness for many market participants to maintain exposure in riskier trades like Tesla and Uber.

Investors Shed High Yield Corporate Debt Exposure

S&P 500 price chart and HYG ETF fund flows

Data source: Bloomberg

Wednesday’s outflow of -$700 million was the largest on a single-day basis since December 21, when traders reduced their exposure to HYG by -$864 million. In the year-to-date, the HYG ETF has returned 5.11% – compared to roughly 10% for the S&P 500. During this period, HYG has seen its net flows total $884 million, despite shedding -$1.06 billion this week alone. Interestingly, investor allocation to the largest broad-market tracking funds has shrunk in the year-to-date.

Broad Market Exposure Cast Aside

S&P 500 price chart outlook and SPY ETF

Data source: Bloomberg

While investors have expressed demand for the riskier HYG fund for the year, net capital flows for the largest Index-tracking funds have dwindled in 2019. SPY, IVV and VOO, which boast a collective $536 billion in assets under management, have seen a total of -$6.3 billion leave their coffers in the first five months of 2019. Prior to May, the funds registered inflows nearing $10 billion – but a total net outflow of -$16.3 billion in the last month has shattered the capital allocation trend.

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The lack of demand – despite an overall market gain of roughly 10% – highlights the shift in the perceived risk-reward ratio of the stock market at current valuations. With trade wars and slowing global growth, yield curve inversions and surprise tariffs, the optimism of many investors has been battered. Until some of these headwinds are resolved or there are newfound reasons for optimism, the “Sell in May and Go Away” theme is poised trickle into June.

–Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more: Stock Market Volatility and its Relationship with S&P 500 Returns

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