ETF Investors Hunker Down in Cash Ahead of Midterms, Fed Meeting

“The increasing allocation of funds to the U.S. money market suggests that conviction about the U.S. asset outlook is falling — a typical sign late in the financial cycle, and a sign that volatility is likely to begin rising soon,” Morgan Stanley strategists led by Hans Redeker wrote in a recent note.

Lured by positive returns on securities largely bereft of duration risk, ultra-short passive vehicles listed in the U.S. have drawn $26.2 billion so far this year, growing their assets under management by 46 percent, according to data compiled by Bloomberg.

It underscores how tighter liquidity is curbing investors’ enthusiasm for venturing into riskier stocks and emerging-market credits.

“Money market instruments are more easily liquidated and repatriated than long-term assets, suggesting that foreign holdings in money markets are more sensitive to market conditions,” the Morgan Stanley strategists conclude.