Risk speedometer: An acceleration abroad


2017-07-28 08:00:00

Global equities in June again posted positive returns, with the FTSE Global All Cap Index returning 0.6%. U.S., non-U.S., and sector equity funds and ETFs gathered $23.3 billion in June, while U.S. bond funds and ETFs (taxable and tax-exempt) gathered $28.3 billion. Although the net equity and bond flows were relatively balanced, investors in the aggregate showed they are still favoring riskier assets, pulling $25.1 billion from money market funds.

After dipping below its five-year average in May, our one-month risk speedometer registered above the average once again in June, the sixth time in seven months that it’s done so since November 2016.

Within equities, non-U.S. funds and ETFs outpaced U.S. funds and ETFs for the fourth consecutive month, gathering $28.8 billion versus net outflows of $5.9 billion. For the second quarter, non-U.S. equity funds and ETFs gathered $85.0 billion—ranking it in the 99th percentile of quarterly cash flow since January 1993 and, at an increase of 3.3% from the start of the quarter, in the 72nd percentile by percentage since January 1993.

Meanwhile, the three-month net cash flow for U.S. equity funds and ETFs turned negative for the first time since November 2016. Given the recent U.S. underperformance relative to non-U.S. equities, these flows exhibit a trend of performance chasing that we called out last month in Risk speedometer: Pumping the brakes.

The 3-month risk speedometer remained above its five-year average, while the 12-month risk speedometer registered above its five-year average for the first time since May 2015.

A closer look at our 12-month risk speedometer

We’ve recently observed consistently higher risk-taking by investors via our one-month risk speedometer. While the change from month to month can be volatile, the speedometer has been mostly above its five-year average since it accelerated in December and January, when investors put the “pedal to the metal.”

Investors' willingness to take on risk has normailized

However, while the 1-month speedometer provides insight into the current state of investors’ willingness to take on risk, the 12-month reading is more indicative of trends. Looking at quarterly readings of our 12-month speedometer, we can see that, despite the acceleration and elevated readings of the 1-month speedometer, the 12-month speedometer has slowly climbed back toward its average, finally reaching it this June.

While this upward trend is not necessarily troublesome, given how low investor risk-taking has been, it does offer reason to pause. Investors need to make sure their investment decisions are dictated by their investment plan and not market euphoria, particularly as equity markets are reaching new highs. For advisors, this is an opportunity to review financial plans with clients, provide guidance, and be their behavioral coaches. After all, these relationship-oriented services provide some of the greatest value to your clients, as we’ve written about in our Vanguard Advisor’s Alpha® research.

Highest net inflows and outflows

Top winners
1-month inflows ($B)   3-month inflows ($B)   12-month inflows ($B)
Foreign large blend 14.0   Foreign large blend 41.1   Large blend 123.5
Inter.-term bond 10.6   Inter.-term bond 30.4   Inter.-term bond 113.2
Large blend 6.9   Large blend 27.5   Foreign large blend 90.1
1-month inflows (% of AUM)   3-month inflows (% of AUM)   12-month inflows (% of AUM)
Trading-levgd. cmdty. 21.2   Trading-levgd. cmdty. 32.9   Industrials 49.9
Cmdty. energy 14.4   Volatility 25.7   Financial 45.9
Single currency 13.2   Trading-levgd. debt 20.5   Volatility 40.1

Note: Cash flows exclude funds of funds.

Source: Vanguard calculations, using data provided by Morningstar, Inc., as of June 30, 2017.

Top losers
1-month inflows ($B)   3-month inflows ($B)   12-month inflows ($B)
Money market –25.1   Money market –34.3   Large growth –89.4
Large value –9.2   Large value –15.4   Money market –69.7
Large growth –3.6   Large growth –9.6   World allocation –24.9
1-month inflows (% of AUM)   3-month inflows (% of AUM)   12-month inflows (% of AUM)
Trading-inv. cmdty. –23.8   Trading-inv. cmdty. –53.7   Trading-inv. cmdty. –75.7
Cmdty. ind. metals –8.3   Cmdty. ind. metals –20.4   Communications –14.9
Latin America stock –3.8   Equity prec. metals –13.2   Long-short credit –14.7

Note: Cash flows exclude funds of funds.

Source: Vanguard calculations, using data provided by Morningstar, Inc., as of June 30, 2017.

More about Vanguard’s risk speedometers

We’ve long tracked industry net cash flows to develop insights into what investors, collectively, are doing with a substantial portion of investable assets.1 Our risk speedometers—our unique lens on investor behavior that we introduced in January—and related cash-flow research also highlight trends that may not be apparent in raw cash-flow data. The result is a nuanced picture of how investors behave. These nuances sometimes reveal that the reality of investor behavior is more complex than conventional wisdom suggests.

Fran Kinniry, Don Bennyhoff, and Yan Zilbering of Vanguard Investment Strategy Group developed the risk speedometers to gauge the level of risk investors are taking in a given period. It’s simply the difference in net cash flow between higher-risk asset classes, such as stocks, and lower-risk asset classes, such as fixed income. The speedometers compare investors’ current risk-taking with longer-term averages.

1 According to data from Morningstar, Inc., assets under management for U.S. open-end mutual funds, money market funds, and ETFs totaled $17.7 trillion as of December 31, 2016.


  • All investing is subject to risk, including possible loss of principal.
  • Diversification does not ensure a profit or protect against a loss.
  • Investments in bond funds are subject to interest rate, credit, and inflation risk.
  • Foreign investing involves additional risks, including currency fluctuations and political uncertainty.

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