Are U.S. Assets Acting As Safe Havens? ETFs In Focus

It’s been less than a month since the coronavirus outbreak in China. The epidemic is raising an alarm as the number of confirmed cases and death toll from topped the 2003 SARS outbreak inside mainland China. Understandably, global markets remained wobbly with Asia and emerging economies taking a massive hit (read: Is Coronavirus an "Opportunity" for Emerging Markets ETFs?).

No wonder, safe haven assets like U.S. treasuries and gold rallied during this phase. iShares 20+ Year Treasury Bond (NASDAQ:TLT) ETF (NZ:TLT) gained 4% since Jan 20. Gold bullion ETF SPDR Gold Shares (NYSE:GLD) (TSXV:GLD) advanced about 1%.

But investors should note that during this period of tension, Wall Street hit record highs. Barring some occasional dips, U.S. stock market stayed quite steady. Since Jan 20, 2020, SPDR S&P 500 ETF Trust (ASX:SPY) added about 1%, Nasdaq-100-based Invesco QQQ Trust QQQ gained about 3.9%. SPDR Dow Jones Industrial Average (NYSE:DIA) ETF Trust (TSXV:DIA) edged up 0.4% (read: Market Scales New High: Top-Ranked Growth ETFs to Buy).

Solid Fund Flows Into U.S. Assets Amid Coronavirus Outbreak

According to Jefferies’ Global Asset Fund Flows Tracker: “In the week 30 Jan-5 Feb, a resumption of strong buying of US equities (+US$14.0 billion, a 7-week high) dominated global equity fund inflows (+US$14.1 billion). However, [emerging market] equity outflows accelerated.”

From Jan 20 to Feb 7, iShares Core S&P 500 ETF IVV and Vanguard S&P 500 ETF VOO saw accumulation of about $9.28 billion and $6.38 billion, respectively. Vanguard Total Stock Market ETF (ASX:VTI) fetched about $1.43 billionduring this period, while bond ETFs like Vanguard Total Bond Market ETF BND and iShares Core U.S. Aggregate Bond ETF (ASX:AGG) have gathered about $1.42 billion and $1.40 billion in assets, respectively.

Corporate bonds did not fall behind, with iShares Broad USD High Yield Corporate Bond ETF USHY and Vanguard Intermediate-Term Corporate Bond ETF VCIT garnering about $1.27 billion and $871.4 million, respectively. Gold has to be a winner in a situation like this, and GLDhauled in about $889.7 million in assets.

iShares MSCI Emerging Markets ETF (NYSE:EEM) EEM lost about $1.22 billion in assets. Asia’s developed country Japan also lost assets, with iShares MSCI Japan ETF EWJ shedding about $697.9 million.

Why is U.S. Market Acting As ‘Safety Trade’?

First of all, developed economies are much more stable than developing economies. Among the developed economies, the United States is much better positioned growth wise. The U.S. economy grew 2.1% in the fourth quarter while the eurozone grew by just 0.1%.

Hence, global equity investors are rushing toward more stable stocks (like U.S. stocks) and larger cap stocks (which are also more stable and liquid than smaller ones) as part of “risk-off” equity investing, per a market watcher.“There is just not enough S&P 500 to go around,” Fundstrat’s Tom Lee said in a note.

On top of that, U.S. corporate earnings look promising. The Fed has been dovish. Some U.S. economic indicators like manufacturing data, private payroll report and non-manufacturing service PMI reading came in upbeat (read: Best & Worst Leveraged ETFs of Last Week).

Recently, Goldman analysts projected that the virus would hurt the U.S. economic growth by up to 0.5 percentage points in the first quarter of 2020, but it would recover over the next two quarters. The global damage is likely to be as low as 0.1 percentage points over the full year.

So, against this backdrop, one may expect the rally in Wall Street to continue, though at a moderate pace.

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