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2 Quick Points to Simplify Fund Flow
Understand how cash flows in and out of an asset
You have probably heard on the news when a major ETF like SPY or QQQ experiences a major inflow or outflow of cash within a specific period. What is that inflow or outflow of cash specifically? It is fund flow. Fund flow is the net of all cash inflows and outflows in and out of financial assets such as ETFs and mutual funds. The following two points will help to simplify fund flow further:
1. Net Inflows vs. Net Outflows
2. Change in Fund Flow Reflects Change in Investor Sentiment
1. Net Inflows vs. Net Outflows
When it comes to fund flow, the performance of the financial asset is not considered, only share purchases (inflows) or share redemptions (outflows). Essentially, when a financial asset such as an ETF experiences a net inflow of cash, the cash is excess money for the ETF’s manager to invest, which theoretically creates demand in the underlying securities of the ETF. On the flip side, when an ETF experiences a net outflow of cash, there is less cash. The ETF manager will likely have to sell some of the underlying securities due to the outflow, which theoretically creates excess supply in the underlying securities of the ETF.
2. Change in Fund Flow Reflects Change in Customer Sentiment
Changes in fund flow, whether it be net inflows or net outflows, also help to reflect changes in customer sentiment for a specific financial asset. When there is an increasing trend of net inflow in an ETF after a short period of net outflow, this showcases that investors in that ETF have become more optimistic and are gaining confidence again in the ETF and in the underlying securities it holds. On the other side, an increasing trend in net outflow in an ETF showcases that investors are not confident in the performance of the ETF and its underlying securities, and that there is a sign of an event that is reducing investor confidence.
For ETFs specifically, an easy tool you can use to find fund flows over a specific period is ETF.com’s Fund Flow Tool. With this tool, you will be able to input the ETF’s ticker, start date, and end date to get either its net inflows or net inflows in millions of dollars. In becoming understanding of fund flows, you are further improving your investment knowledge.
