Some ETFs stay healthy during COVID-19

Key takeaways

• During the peak of the recent market panic, US stock ETFs managed to attract relatively strong fund flows.
• Bond ETF flows hit some turbulence, interrupting their multiyear momentum.
• Some of these trends have begun to reverse in recent weeks as markets have rallied on hopes of a quick recovery and massive fiscal/monetary stimulus efforts.

After US-based ETF assets under management surpassed $4 trillion last year, it might have been reasonable to assume some of that momentum would be blunted due to the COVID-19 outbreak. But net fund flows (inflows minus outflows) for ETFs have not abated, generally speaking. That's according to BlackRock's most recent Follow the Flow report.*

Here were the recent trends for exchange-traded products (ETPs)—which are composed almost entirely of ETFs—during a big slice of the coronavirus pandemic thus far.

ETFs amid the storm

Looking at the 4 weeks beginning in mid-February—which is around the time the coronavirus pandemic and subsequent social distancing efforts started to ramp up in the US—several notable ETF trends developed.

US equity (i.e., stock) ETFs saw net inflows of $4.5 billion over this period. Meanwhile, developed market stock ETFs excluding the US and emerging market stock ETFs had net outflows of $5.1 billion and $7.3 billion, respectively (see US-domiciled ETP flows chart). In a trend change, fixed income (i.e., bond) ETFs had net outflows of $23 billion. That is notable because it is a reversal from 2019, where bond ETF flows had been a major source of strength.

Another interesting trend was that, as volatility picked up at the end of February, so too did ETF trading activity relative to prior levels. Indeed, ETF volume traded picked up almost in lockstep with an increase in volatility (see Total ETP value traded vs. VIX chart). Additionally, for the 30 days prior to March 20, ETFs averaged 34% of all equity volumes. That compares to an average of 26% during 2019. This may suggest that investors are increasingly comfortable turning to ETFs as a trading vehicle amid market turbulence.

Digging into US stock ETF flows

Looking closer at the US stock ETF flow strength, you can see that—at the sector level—defensive sector ETFs attracted money, while cyclical sector ETFs saw outflows. Defensives gathered $6 billion in flows during the 4-week period, while cyclicals shed $10 billion (see US sector flows chart). Among cyclicals, the most money flowed out of financial and industrial ETFs.

This rotation away from cyclicals and into defensive sectors during market volatility is not unusual. However, it is still worth noting that, during the historically rapid stock market selloff over this period of time, money flowed into defensive sectors, rather than a mass exodus across the board.

Data from more recent weeks has shown this trend reversing, as markets rallied and the riskier cyclical sectors have seen greater fund flows compared with defensive sectors.

Bond ETFs finally stumble

When it comes to momentum, no segment of the ETF flow universe has had more of it than fixed income. Bond ETF flows were the primary source of strength in 2019, but that trend reversed on coronavirus fears across most fixed income categories over the 4-week period. Corporate credit outflows surpassed $19 billion, led by roughly $11 billion in investment-grade credit outflows and $6 billion in high-yield outflows. Broad market bond outflows totaled $11 billion (see Fixed income ETF flows chart).

Some of the bond ETF flow weakness was offset by $14 billion in US government ETF inflows (short-term government bond ETF inflows totaled roughly $21 billion and long-term government bond ETF outflows were $5 billion).

Investing implications

As mentioned, some of the trends that dominated during the height of the market panic have reversed in recent weeks—after passage of massive fiscal and monetary stimulus packages helped blunt some fears of the worst possible outcome for the economy and markets.

Of course, recent or historical trends are not necessarily a harbinger for the future. Moreover, it is generally inadvisable to take action based on any one piece of information, including fund flow data. Nevertheless, 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.