ETF flows slow: Q2 2022 report

Key takeaways

• US-listed ETF flows are positive this year, but down sharply from 2021's record pace.
• Stock ETF flows in particular have slowed dramatically.
• More mutual funds have converted to ETFs.

Compared to most other years, ETF net flows (i.e., inflows minus outflows) thus far this year would be considered strong. But that's not the case when contrasted with 2021, when US-listed ETF flows set all-time records. For the second straight quarter, ETF flows were once again down year-over-year. They gathered $294 billion in the first half of 2022, down from $466 billion in the first half of last year.*

Here are highlights from recent ETF trends.

Stock ETF flows slow amid volatility

Issuance hasn't been a problem for ETFs thus far this year. 206 new ETFs have launched in 2022, as of early July, keeping pace with last year's annual record of over 450 launches. Of the 206 launches, 125 are actively managed ETFs.

But ETF flows are down substantially compared with 2021's blockbuster pace (see Quarterly ETF flows in billions chart below). Demand for US equity (i.e., stock) ETFs in particular was impacted by interest rate hikes, lingering COVID-19 complications, global supply chain problems, and geopolitical tensions that have stocks on pace for their first negative year since 2018.

There was generally a rotation by ETF investors into defensive sectors during Q2. Among the 11 stock market sectors, defensive sectors had inflows while nearly all cyclical sectors had outflows (see US sector ETF flows in billions chart below). Health care ($5 billion), utilities ($2 billion), and consumer staples ($2 billion) attracted the most net flows, while financials (-$14 billion) saw the most outflows. Notably, technology was the lone cyclical sector to attract positive flows.

The rotation to defensive sectors reflects the shift in market sentiment this year and runs counter to a longer-term trend. Looking at the past 10 quarters, defensive sector flows have only outperformed cyclical flows for 2 other quarters (Q3 2021 and Q1 2020).

Bond flows keep pace

For the first time in 6 quarters, stock and bond flows were nearly even due to a combination of slowing demand for stock ETFs and robust demand for bond ETFs (see Q2 US-domiciled ETF flows in billions chart below).

Government bond ETFs saw $41 billion net flows, which more than doubled their previous quarterly inflow record. Short-term bond ETFs accounted for $26 billion of the flows, compared to only $9 billion in Q1. On the other hand, high-yield bond funds have seen massive outflows in the first half of the year, losing $16 billion—that category's worst first half of a year on record.

Other notable trends

Commodities and inflation have been big factors for investors and consumers this year. Yet rising gas prices, which saw the average US national price per gallon top $5 in mid-June (they have since fallen below that level), have not resulted in big flows for ETFs that track oil. Actually, oil-focused ETFs have seen outflows throughout the first half of the year.

Broadly, commodity ETFs had net outflows in Q2. Gold ETFs, in particular, experienced sizeable outflows ($3 billion) after gathering $10 billion in Q1.

Another interesting trend that has been gaining traction over the past couple years is the conversion of some mutual funds to ETFs. Beginning in 2021, 16 mutual funds with over $40 billion in assets converted to ETFs. So far in 2022, 8 mutual funds with $17 billion in assets have completed conversions to ETFs, and more are expected to do so by year end. In sum, the 32 converted funds have attracted $4 billion in net flows in the first half of 2022. It's worth noting that converting funds can bring over their track record and assets, unlike a newly launched ETF.

Exploring the ETF universe

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.