The war in Ukraine, scorching inflation, and other investing risks couldn’t stop ETF flow momentum in Q1. After 2021 saw record ETF net flows (i.e., inflows minus outflows) of over $900 billion, they had a slower start to 2022 before picking up pace in the latter half of the first quarter of the year.
Here were the most recent trends in ETF flows.
Stock ETF flows lead
ETFs' popularity continues to grow as an investing and trading vehicle. Consider this: ETFs accounted for 33% of total US exchange volume ($15 trillion) in Q1.* That's a record for ETFs’ percentage of total exchange volume. Moreover, fund flows continue to pour into ETFs.
But it didn’t look like it would be smooth sailing at the start of 2022 when, across all asset classes, ETF flows had a rocky start. Inflation, economic growth worries, and looming interest rate hikes rattled markets and fund flows. Momentum got going in February, and fund flows in March were the third most ever for that month, totaling $93 billion. All this while the war in Ukraine unfolded, the Fed raised rates to fight inflation, and some key indicators were flashing warning signs about the global economy.
And once again, it was stock ETF flows that led the pack. Specifically, US stock ETFs accumulated more than $110 billion in net flows during the first quarter of 2022 (see Q1 2022 US-domiciled ETF flows in billions chart below). While the total amount of equity (i.e., stock) ETF flows this quarter ($154 billion) were down significantly from last year’s blockbuster pace, when stock ETF flows grew a record-shattering $209 billion during Q1, it's still a robust number historically and by far the most of any category thus far this year.
Among the 11 stock market sectors, cyclicals generally outperformed defensive sectors, in terms of net flows (see US Sector ETF flows in billions chart below). Technology ($6 billion) and energy ($4 billion) attracted the most net flows, while consumer discretionary ($4 billion) saw strong outflows in Q1. Clearly, higher inflation and economic growth concerns shifted investor choices.
US sector ETF flows in billions
Meanwhile, fixed income (i.e., bond) ETFs had a relatively tough start to the year. Of the bond categories that had positive flows, government/treasury bond ETFs dominated ($19 billion), seeing the largest quarterly inflow since the fourth quarter of 2018 ($27 billion). On the flip side, high-yield ETFs saw $12 billion in outflows in Q1—the worst quarter ever for the category.
Outside of stock and bond flows, commodity flows had an understandably tumultuous Q1. Several commodity prices skyrocketed to all-time highs amid the outbreak of war (with many subsequently plunging back to pre-war levels), and commodity ETF flows saw similar volatility. On the positive side, gold ETFs took in $10 billion of inflows for the quarter, representing 55% of all commodity flows. On the other hand, oil and gas commodity ETFs had nearly $300 million in outflows during Q1.
Other interesting trends
16 mutual funds (from 6 different issuers) with over $40 billion in assets converted to ETFs in 2021. Those ETFs attracted $4.7 billion in net flows since converting, with 12 out of 16 funds converted seeing net inflows. Another 7 mutual funds (worth $18 billion) have announced plans to convert in 2022.
An interesting aspect of these conversions is that the converting funds can bring over their track record and assets, unlike a newly launched ETF. The funds can also provide potential tax efficiency and a reduction in management fees due to the ETF structure.
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.