‘Summer of cynicism’? How ETF investors are navigating the volatility

The summer rally has rolled into period of fits and starts through August as the threat of a possible recession looms. But as a potential pivot from the Federal Reserve hangs in the balance, some investors are doing away with short-term debt and finding pockets of strength in large caps.

“Investors are sort of acting like it is the summer of cynicism,” Matt Bartolini, head of SPDR Americas research at State Street, told CNBC’s Leslie Picker in an interview Monday on “ETF Edge.”

“They’re not so much buying into this rally.”

Bartolini said that a point of pessimism toward the summer rally is how long it will last. Overall, flows have been generally positive with roughly $44 billion in inflows in the month of August alone. But over the last three months, he said, the trend is lower than historical figures.

“In the month of August, if it were not for U.S. equities – which took in over $30 billion so far – the equity segment alone would actually have net outflows,” he said.

Positive flows to certain sectors are an optimistic sign of economic recovery, Bartolini said, with defensive areas like health care, consumer staples and utilities that typically work well historically in times of slowdowns continuing to be allocated to.

“That’s the first time they’ve had inflows in the last three months,” Bartolini said. “But when you dig beneath the surface, it’s still defensive positioning.”

ETFs can often be used to obtain exposure to directional bets for the market’s downsides, as well as hedging out specific positions. In recent weeks, short positioning has been on the rise as the market moves to higher levels.

“Because the Fed is a little clearer on rising interest rates and they’re fighting inflation, they’re less concerned about recession but how deep that recession will be,” Tom Lydon, vice chairman at VettaFi, said in the same interview.

In turn, that translates to investors being more bullish on the market, he added.  

Lydon said that VettaFi has seen money come back into corporates and high yields following net redemptions in fixed income ETFs during the first four months of the year and leaving areas that were safer like short-term duration.

“Dividends got a lot of flows at the beginning of the year,” he said, “and actually in the last couple months have seen some outflows.”

With the changing shifts in sentiment amid the summer volatility comes the prospect of ETF investors nearing an inflection point as the market heads into the fall season.

“I think the reality is that this broad transition as we look at it from the new energy economy is continuing to be stronger,” Tim Johnston, partner at Blue Horizon Capital and co-founder of Li-Cycle, said in the same interview.

Johnston noted that while there might be short-term pullbacks, there are clear leaders among exchange-traded funds as the industry continues to innovate and more products enter to market.

“We see that the trend is continuing,” he said. “We see that enthusiasm for the sector remains strong even if in the short term there’s some skepticism around what’s going to happen day to day.”