Morgan Stanley
  • Thoughts on the Market Podcast
  • Apr 16, 2021

What Are Other Investors Thinking?

With Andrew Sheets


Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, April 16th, at 2:00 p.m. in London.

I find there's always a great deal of interest from investors in what other investors are doing. Some of this is natural curiosity and keeping tabs on the competition, but where money is moving also has obvious impacts for the market. Today I'm going to talk about flows in Exchange Traded Funds, and how they influence our broader market thinking.

Exchange Traded Funds, or ETFs, are obviously only one of several ways that people invest - but they're a large one. ETF data compiled by my colleague Serena Tang covers funds with over $5.7T in assets. This data has some other nice properties: being timely and also being quite specific, as many ETFs reflect a particular asset class or sector.

The most striking thing about this data is how much money has been flowing into the market. Over the last 12 months about $650B has flowed into stock and bond ETFs, a flow that's unusually large versus history, and may help explain why markets have been so strong.

It also tells us something about the nature of those flows. Parts of the market have unquestionably seen speculative activity, as money has poured into smaller, more volatile companies. But the ETF data suggests that the real story is more boring. For all of the focus on those speculative, high beta segments of the market, a much larger flow has been into ETFs which simply, and less excitingly, buy a wide basket of securities.

ETF flows also allow us to see trends and answer questions. For trends, one of the most striking has been the amount of money going into funds that focus on Environmental, Social and Governance factors, also known as ESG. ESG-focused stock ETFs have seen $35B in inflows over the last year, more than funds focused on Emerging Market Stocks, U.S. High Yield Bonds, or Gold. Considering how much time I spend talking about those three asset classes just mentioned, I think that's pretty interesting.

They also help us answer questions. Bonds have had poor returns this year and have also been more correlated with the broader stock market. Both have raised questions about whether bonds can still diversify a portfolio.

We think they can, and please check out last Friday's episode for a discussion why, but ETF flows are part of our thinking. The fact that we haven't seen outflows from bond funds, despite their poor performance, makes us think that other investors see the same diversification argument that we do. Interest in what others are up to isn't always productive, but in this case, we think it's useful.

Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us to review. We'd love to hear from you. 

Keeping tabs on how other investors are trading can do more than just satisfy curiosity. It can provide a window into trends and current market debates.

Each week, Chief Cross-Asset Strategist Andrew Sheets, or a member of his team, offers perspective on the forces shaping the markets as well as insights on investment opportunities and risk across global asset classes.

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