Chief Investment Strategist
Summary: Yesterday's impressive rebound in US technology stocks were backed up by record inflow into the QQQ ETF tracking the Nasdaq 100 Index. In today's equity note we take a look at what that means for the direction and bullishness of the US technology stocks.
Monday’s sell-off in Nasdaq 100 was accompanied by the largest outflow observed on record ($3.48bn) in the Invesco QQQ Trust Series 1 ETF (QQQ:xnas) tracking Nasdaq 100 the leading US technology index. Yesterday, the price action ended being positive as the Nasdaq 100 showed a remarkable comeback despite a horrible session across USD, gold, silver, and European equities. The inflow into the QQQ ETF was record $4.16bn. Overall, the rebound which started in Nasdaq 100 yesterday seem to be key to more positive equity markets today. The record flows in the QQQ ETF are an indicating of widespread speculation in US technology stocks and that this is increasingly becoming the leading index for sentiment during the trading session.
The in- and outflow of an ETF is a function of daily liquidity issues in the ETF as described in this BlackRock whitepaper. If excessive selling pressure pushes down the ETF price below the underlying net asset value (NAV) then the authorized participant (AP), which is the only one that can engage with the ETF sponsor (BlackRock, Vanguard etc.), can acquire the ETF shares and redeem them with the ETF sponsor and gain the spread between the NAV of those ETF basket shares and the ETF price. This mechanism creates an outflow of outstanding ETF shares. The reverse dynamic happens if the QQQ share price is pushed above the underlying basket NAV. The AP can then buy the underlying shares in the ETF basket and give them to the ETF sponsor in return for ETFs that they can then sell at a gain in the secondary market. It is important to understand that the ETF flows are a function of intraday supply/demand dynamics in the ETF to ensure equilibrium.
What informational value is there in ETF flows? Can they predict returns? On average ETF flows do not seem to create an edge in the market, which makes sense, and as such they do not statistically predict next day’s return. However, there seems to be a small link between large ETF shocks and subsequent daily returns, but these observations are still hard to isolate and validate. What we can say is that intraday demand was very high in QQQ yesterday indicating that current levels are attracting strong bids and that it probability skews probability in favour of support in US technology stocks at current levels and likely a rebound. The next couple of trading days will show whether this thesis is right.
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