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Rising rates slow ETF momentum again

Key takeaways

  • ETF flows slowed again compared to the same quarter last year.
  • Stock ETF flows have dropped dramatically from 2021's record pace.
  • Bond ETF flows have sustained their recent strength.

Rising interest rates have negatively affected stocks this year, and ETF investors have felt that impact as well. While there were some bright spots for ETF flows during the third quarter (Q3), the year-over-year downtrend in net flows (i.e., inflows minus outflows) continues, putting 2022 on track to fall well short of 2021's blockbuster year.

Here are highlights from recent ETF trends.

Stock ETF flows slow again, bonds stayed strong

ETF investors continue to have an expanding plate of investing choices. 319 ETFs have launched thus far this year, of which 117 starting trading in Q3. That puts 2022's pace close to 2021's annual record of over 450 ETF launches.

While issuance of new ETFs remains robust, net flows are down compared to last year. Rising interest rates, the war in Ukraine, and other factors that have stocks in the red year to date have clearly slowed ETFs' momentum relative to last year. ETFs have now accumulated $414 billion in net flows so far in 2022, down from $638 billion by the same point last year. That's after ETFs added about $100 billion in net flows during Q3. While these flows would be a relatively healthy amount for most other years, it's a tough comparison to 2021's record-setting pace (see ETF flows by quarter chart).

This chart is described in the text below.
Source: Fidelity Investments, as of October 1, 2022.

Rising interest rates appear to have impacted US equity (i.e., stock) ETF flows the most, although they were still the strongest category in Q3. Broad-based index ETFs saw the most flows for stock ETFs, with the top 10 ETFs by market cap accounting for nearly 70% of overall flows for this category. During the same quarter last year, stock ETF flows accumulated roughly double that of Q3 this year. 

Meanwhile, fixed income (i.e., bond) ETF flows were relatively strong again. Bond ETF flows are normally not as high as stock ETF flows, but they nearly were last quarter. In fact, bond ETF flows during Q3 this year beat last year's Q3 bond ETF flows, with government/treasury bond ETFs having another record quarter ($42 billion in net flows). That brings the tally for this category up to $105 billion in 2022. Investors have also shown a preference for short-term bonds, which accounted for $19 billion of the bond flows this quarter, and they represent nearly half of the bond flows year to date.

Another interesting trend has been outflows for commodity ETFs. Perhaps no other segment of the market has been as volatile as commodity markets, which have been struck by geopolitical confrontations, supply chain disruptions, natural disasters, and other factors. Commodity ETFs saw nearly $20 billion in net outflows during Q3, as precious metal ETFs saw $9.5 billion in outflows (see Q3 2022 US-domiciled ETF flows chart). After gathering $10 billion in net flows during Q1, gold ETFs had outflows of $3 billion in Q2 another $8 billion in outflows during Q3.

This chart is described in the text below.
Source: Bloomberg, as of 09/30/2022. DM/Global Equity = Developed market/global equity. EM Equity = Emerging market equity

Investors sought relative safety with defensive sectors

For the second consecutive quarter, there was a general rotation by ETF investors into defensive sectors. Among the 11 stock market sectors, the main defensive sectors had inflows during Q3, while all cyclical sectors had outflows (see US sector ETF flows chart).

This chart is described in the text below.
Source: Bloomberg as of 09/30/2022.

Utilities ($2 billion), consumer staples ($1 billion), and health care ($1 billion) attracted net flows, while sectors that are the most commodity-price sensitive (materials and energy) had the largest outflows.

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 11 quarters, defensive sector flows have only outperformed cyclical sector flows in 3 other quarters (Q2 2022, Q3 2021, and Q1 2020).

Exploring the ETF universe

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.

Find the right ETF for you

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

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 10/01/2022. 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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