Q2 ETF flow momentum slows from record pace

After the a blistering start to 2021, ETF flows moderated last quarter.

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Key takeaways

  • Despite the quarterly slowdown, ETF flows still appear to be on their way to breaking 2020's record total.
  • There has been a recent shift in momentum toward quality-focused ETFs.
  • Investment-grade ETF flows supported another solid quarter for bond flows.

Exchange-traded fund (ETF) flows might still double last year's record-setting net flows (i.e., inflows less outflows), according to BlackRock's most recent ETF flows report.* The historic momentum for ETFs that built in the first quarter (Q1) of 2021 slowed in the first 2 months of the second quarter (Q2), and then accelerated in June.

Here were the most recent trends in ETF flows.

Flows ramp up in June

Q1 net flows for exchange-traded products (ETPs)—which are comprised almost entirely of ETFs—set a pace to potentially break 2020's full-year record of $476 billion in net flows. That momentum appeared to decelerate substantially in early Q2, before ramping up by quarter end—particularly within stock ETFs.

Indeed, stock ETF flows jumped roughly 2.5 times in June, compared with May (reaching $72 billion in net flows, the second-highest month on record behind the all-time monthly record of $76 billion set in March of this year). June's massive haul followed a significant drop during April and May from the March record (see 2021 flows into stock ETFs chart).

A trend that continues to see momentum is sector ETFs being utilized to implement investing outlooks. Globally, sector ETFs have accumulated $108 billion in net flows year to date, which nearly matches the $112 billion in sector ETF net flows for all of 2020. Also, quality-focused ETF net flows recently touched nearly $2 billion in June, which is the highest monthly level since November 2019. Meanwhile, value-focused ETF net flows are at their lowest level in 4 months.

Regional flows were strong as well last quarter, which is a trend that reaches back to last year. European stock ETFs have had net inflows every month since November 2020, representing the longest streak since November 2016 to November 2017. Moreover, the $24 billion in net flows that European stock ETFs have gathered year to date puts this group on pace to have the largest year of net flows since 2017.

Investment-grade, emerging-market debt in favor

Among credit categories, investment-grade flows were $9.4 billion in Q2, marking the highest level since Q3 of 2020 (see Investment-grade and emerging-market debt help bond flows chart). Emerging-market debt was another source of strong net flows, adding more than $2 billion each month in Q2. Demand for China bonds underpinned this strength, with net flows of roughly $1 billion in May and June. On the flip side, high-yield bonds have not been in favor in 2021 thus far.

More broadly, fixed income (i.e., bond) ETF flows have continued to demonstrate strength. Global flows in bond ETFs were $139 billion by 2021's midpoint, which was ahead of last year's booming pace of $126 billion in the first half of 2020. Inflation-linked ETFs have been in demand, gaining $22 billion in net flows through the first half, blowing past 2020's full-year tally of $17 billion. More recently, global flows into rate exposures (primarily US Treasury ETFs) reached nearly $6 billion in June—the highest monthly inflows for this category since March 2020.

ESG momentum

In other segments of the ETF universe, investor interest has continued to grow for ESG factors (environmental, social, and governance), as evidenced by demand for ESG-focused sustainable funds. After a record-setting month in February for ESG-focused ETF flows ($18 billion), US and EMEA-listed ESG ETFs added another $9 billion in net flows during June, following $6 billion in net flows during May. ESG-optimized strategies have had the most momentum in recent months in this category, following by environmental strategies.

Exploring the ETF universe

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.

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.

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