Markets

Mystery Surrounds
$7 Billion Outflow
From Vanguard S&P
500 Fund
By
Claire Ballentine
and
Katherine Greifeld
December 4, 2020, 9:01 AM EST

VOO ETF posted largest drawdown on record in trading this week Below-average
volumes suggest a deal took place off-exchange
LISTEN TO ARTICLE

A record outflow from one of Vanguard Group’s biggest exchange-traded funds is

stirring speculation over who was behind it and why.

More than $7 billion was pulled from the $172 billion Vanguard S&P 500
ETF (VOO) on a single day this week, according to data compiled by Bloomberg,
about 4% of the fund’s assets. But trading volumes were below the one-year
average and there were no obvious outsized transactions, while the U.S. equity
benchmark rose on the day -- making a mass exodus less appealing.

It’s all leading to a theory that a major holder of the fund executed a large over-
the-counter trade.
“We think the redemption didn’t show up because it was an outsized primary
market sale,” said Eric Balchunas, a Bloomberg Intelligence ETF analyst. Rather
than shopping for a tie at a store, “this is like someone going straight to the
tiemaker, and that’s rare since most ETF usage is smaller investors,” he said.

When cash flows into an ETF, a market maker known as an authorized participant
gives the issuer more of the fund’s underlying assets in exchange for new shares to
meet demand. When money is being taken out, the process works in reverse.

Ordinarily an investor buys or sells their shares on an exchange. But instead of

selling on the open market, they could hand them directly to an AP, who can
redeem them with the issuer in return for the underlying assets. Those assets can
then be sold down by the AP or passed on to the investor to hold or sell.

“Trading activity and flows are not actually systemically tied together,” said Dave
Nadig, chief investment officer and director of research at ETF Flows, a research
and data provider. Since the huge withdrawal didn’t show up on the tape, it
suggests an institution collected a position worth $7 billion but preferred to have
the underlying assets, he said.

It’s not possible to know for certain who pulled out the cash. According to
the latest available data, Bank of America Corp. is the largest holder in the fund,
with shares worth about $14 billion. Raymond James Financial Inc. is next with
about $5.2 billion, followed by Parametric Portfolio Associates with $4.9 billion.

Spokespeople for Vanguard and Parametric declined to comment on the flows,

while Bank of America and Raymond James didn’t immediately respond to
requests for comment.

The scale of the withdrawal indicates that VOO is now being used by large
institutions in addition to being a favorite with retail investors, Balchunas said. The
fund is cheaper than its main competitor, the SPDR S&P 500 ETF Trust (SPY). It
has an 0.03% expense ratio, compared with 0.095% for SPY.

VOO has attracted $19.5 billion of inflows this year, second only to the Vanguard
Total Stock Market ETF (VTI), which has lured $27.8 billion. SPY is leading
outflows after seeing $26 billion pulled from the fund.
 “This really does speak to the usage of ETFs as portfolio tools,” Balchunas said.
“VOO is now being used by the big boys.”

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