While all 3 major US indexes finished the first quarter (Q1) in the green, bank collapses, rate hikes, and the possibility of recession appear to have slowed investors' hands at scooping up ETFs. That followed a huge 2022 for ETF net flows (i.e., inflows less outflows), which was the second best year ever.
Here were the most recent trends in ETF flows.
Market worries slow ETF flows?
Investors continue to have more exchange-traded fund choices than ever, with 78 new ETFs launching so far this year. Investors just weren't as interested in them during the first 3 months of 2023 compared with prior quarters (see ETF flows by quarter chart). A myriad of risks that sprung up over the course of Q1 may have sidelined money that might have otherwise flowed into ETFs.
In particular, equity (i.e., stock) ETF flows had a weaker-than-usual quarter, gathering just $27 billion in net flows in Q1. That's this category's lowest quarterly tally since the Covid outbreak during Q2 2020.
US equity and sector ETFs experienced outflows, while international and emerging market equities started the year on a positive note. Among the 11 US stock market sectors, defensive sectors generally outperformed cyclical sectors in terms of net flows. However, both categories experienced net outflows in Q1. Financials ($1.3 billion) and materials ($1 billion) attracted the most net flows, while energy ($6 billion) and health care ($4 billion) led outflows (see US sector ETF flows chart).
Bond ETFs show strength
Whereas stock ETFs showed some weakness, fixed income (i.e., bond) ETF flows sustained their momentum—continuing a trend from 2022. In fact, for the first time since Q3 2020, bond ETF flows outpaced equity ETF flows.
In particular, government/treasury bond ETFs dominated fixed income flows (see Q1 2023 US-domiciled ETF flows in billions chart). The category saw $38 billion in flows during Q1, and in the last 12 months they have seen $144 billion of flows—representing 68% of overall fixed income ETF flows. Treasury-related ETFs comprised 7 of the top 20 ETFs in terms of net flows. Also of note, municipal ETFs had their first quarterly outflow in 10 years.
The strength in fixed income flows may not be surprising when considering the both volatility during Q1 associated with further central bank rate hikes and the relatively brief global banking turmoil. Bond ETFs are generally considered less risky assets compared with stock ETFs, and a flight to safety amid Q1 volatility was clear.
Interested in ETFs?
ETF flows can be a useful tool to help identify market trends, to see where investors are broadly putting their money. If you are exploring the ETF universe, the key is to find those that align with your objectives and risk constraints, regardless of the trend in flows.
One tool that may be of use is Fidelity's ETF Screener, which can quickly sort through a lot of data based on the filtering selections you make. You can search for ETFs using a variety of characteristics, like the fund's objectives, fundamentals, technicals, performance, volatility, trading characteristics, tax considerations, and analyst ratings.