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ETF investors looking for bonds

Q1 ETF flows were relatively weak, but an area of strength was fixed income.

Key takeaways

  • US-listed ETF flows slowed down in Q1.
  • Stock ETFs had their least amount of net flows since the COVID outbreak.
  • Government/treasury bond ETFs continued to dominate fixed income inflows.

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.

Source: Bloomberg, as of 03/31/2023.

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).

Source: Bloomberg as of 03/31/2023.

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.

Source: Bloomberg, as of 03/31/2023. DM/Global Equity = Developed Market/Global Equity. EM Equity = Emerging market equity.

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.

Why follow fund flows?

Tracking fund flows can help you evaluate which parts of the market may have momentum and can be useful if you incorporate trends and patterns in your analysis. You can assess fund flows by asset category, region, and objective, among other characteristics. Additionally, if you're a long-term investor, you might look at annual or multiyear trends. If you have a shorter investment horizon, you might track weekly, monthly, or quarterly fund flows.

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Use our screener to identify ETFs and ETPs that match your investment goals.

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More to explore

Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each ETP has a unique risk profile, detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.

Past performance is no guarantee of future results.

The Fidelity ETF Screener is a research tool provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert Screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these Screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis. All the data presented within are from Fidelity Investments and Bloomberg, as of 04/20/2023. For our purposes, we refer to funds, ETPs, and ETFs interchangeably. These data do not reflect mutual fund data, and investors who would like to monitor the entire fund flow universe may want to consider flows going into or out of mutual funds.

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