Smart, Dumb and Contrarian ETF Flows - TheStreet

Smart, Dumb and Contrarian ETF Flows

Investors moved out of equities and into gold and fixed income in May, but they also made some contrarian bets using ETFs. SPDR Gold Shares (GLD) was the big winner, as $4.2 billion flowed into the fund.
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NEW YORK (TheStreet) -- Investors moved out of equities and into gold and fixed income in May, but they also made some contrarian bets using ETFs. SPDR Gold Shares (GLD) - Get Report was the big winner, as $4.2 billion, or more than 100 tonnes of gold, flowed into the fund. Meanwhile, the smart money that loaded up on the iPath S&P 500 VIX Short Term Futures ETN (VXX) - Get Report was selling into strength in May. And, what still seems to be dumb money at this juncture, investors dumped another $628 million into ProShares UltraShort 20+ Year Treasury (TBT) - Get Report.

In aggregate, $3.4 billion exited long U.S. equity in May, while $2.3 billion flowed into fixed income and $5.2 billion flowed into commodities, almost all of which went into gold, oil and other precious metals. Long global and international equity ETFs actually saw inflows of $1 billion, despite a stronger U.S. dollar hurting returns, although the total was well below the more than $5 billion of inflows from April.

The same ETFs that make repeated appearances at the top of the monthly inflows were there again in May. GLD saw $4.2 billion in inflows, followed by the $2.5 billion flowing into

SPDR S&P 500

(SPY) - Get Report

; the $1.8 billion that flowed into

Vanguard MSCI Emerging Markets

(VWO) - Get Report

; and the $1 billion that went into

iShares MSCI Emerging Markets

(EEM) - Get Report

.

Market Vectors Gold Miners

(GDX) - Get Report

rounded out the top five with nearly $900 million in inflows and was followed by

U.S. Oil

(USO) - Get Report

, as investors went bargain hunting for crude; USO fell 17.6% for the month.

Contrarian bargain hunters also picked up shares of

iShares MSCI Germany

(EWG) - Get Report

. The fund saw inflows of $353 million in May, an impressive sum. A weaker euro has hammered EWG in 2010, but in terms of local currencies, the index behind EWG has actually performed better than the S&P 500 Index. The weaker euro helps German exports and if the euro can arrest its slide, the fund could do well.

ETF investors were also betting on a stronger euro, as $152 million flowed into

CurrencyShares Euro

(FXE) - Get Report

, reversing the outflows of the previous month. That was slightly more than the $140 million that flowed into

ProShares UltraShort Euro

(EUO) - Get Report

, which delivers double the daily inverse of the euro. EUO investors appear to be the smart money in the first week of June, but it's a long month.

Meanwhile, the dumb money keeps flowing into TBT, which fell about 11% in May. Although more than $600 million was added last month, it mostly covered the market losses, as assets under management increased only $42 million. It may be that some of these investors jumped into the fund after TBT fell, betting that the 30-year Treasury yield is bottoming around 4%. Since May of 2009, the yield has bounced in a trading range between 4% and 5%.

However, at more than $5 billion, the amount of money in this fund is huge, placing it in the 30 largest ETFs and the largest leveraged ETF. Based on the volume in this fund relative to its assets, the average holding period is about two weeks, whereas most leveraged ETFs have a holding period of one day or less. Obviously, TBT could pay off big if rates go up, but timing is very important in leveraged ETFs due to compounding error, and there's no sign of persistently higher interest rates. Investors who hang on to this fund will incur losses that the fund may not be able to recoup, even if interest rates do finally move higher.

Contra TBT is the smart money moving in and out of VXX and

iPath S&P 500 VIX Mid Term Futures ETN

(VXZ) - Get Report

. While I have

criticized these products , the money flows indicate that traders bought while the fund was low and sold when it rallied. Unlike gold and fixed income, which attracted new money as they performed well in May, VXX saw more than $1 billion of outflows, leaving the fund with $1.1 billion at the end of the month. VXZ saw $541 million in outflows and finished with $636 million. VXX was up 35% in May and VXZ gained 23%.

PIMCO was a big winner in May thanks to a single fund. The firm's

Enhanced Short Maturity ETF

(MINT) - Get Report

didn't attract much money in its first few months of existence, but last month almost $600 million flowed into the fund. MINT is an actively managed fund that invests in very short-term bonds and aims to have a higher yield than a money market fund. Last month's flows placed MINT in the top 10 largest inflows, one spot ahead

of iShares Barclays 1-3 Year Treasury

(SHY) - Get Report

, a fund with 10 times as many assets.

Investors clearly looked for safety in gold last month and they continue to increase their holdings in fixed income. Meanwhile, the weak market performance slowed the flow of capital into emerging market ETFs, but it didn't stop or reverse the positive flows as investors stick with this strategy. Finally, the big flows into MINT means that this fund can now be considered as an option when selecting a short-term bond fund as a cash replacement.

At the time of publication, Dion Money Management owned IAU and GDX.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.