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A gush of active ETF flows

Here’s where the Q2 ETF momentum was.

Key takeaways

  • ETF flows surged in Q2 after a relatively slow Q1.
  • Actively managed ETFs appear to be gaining traction quickly.
  • More mutual funds converted to ETFs.

The S&P 500 gained 8.5% during the second quarter (Q2), which appears to have refilled the momentum behind ETF net flows (i.e., inflows less outflows)—and stock ETF flows in particular. Perhaps the most interesting trend that made its way down the ETF channel last quarter was the growing popularity of active ETFs.

Here were the most recent trends in ETF flows.

Active ETFs emerging

ETFs lost some momentum at the outset of the year. In the first quarter (Q1) of 2023, ETFs accumulated less than $80 billion in net flows. Relatively speaking, that’s not much (for comparison, net flows were closer to $200 billion during the last quarter of 2022).

But the spigot opened back up a bit in Q2, as demand for stock ETFs appeared to coincide with rallying stock prices. Total ETF flows gushed well past $130 billion in Q2, with total equity (e.g., stock) ETFs accounting for $96 billion of inflows (up from just $28 billion in Q1). US equity ETFs alone accumulated nearly $80 billion in net flows (see Q2 2023 US-domiciled ETF flows in billions chart below).

The chart is described in the text above the chart
Source: Bloomberg, as of 06/30/2023. EM equity = Emerging market equity.

In addition to the bounce back for net flows, it’s clear that actively managed ETFs have gained steam. Actively managed ETFs captured 17% ($25 billion) of overall ETF flows in Q2, even though they represent just 6% ($429 billion) of ETF assets under management. Of the total active flows in Q2, actively managed stock ETFs accounted for 80% ($20 billion)—a notable increase from prior quarters. Actively managed stock ETFs have captured over 30% ($52 billion) of total net flows thus far this year.

Financial institutions have noticed this momentum. Of the 106 ETFs that launched in Q2, 75 of those ETFs were actively managed.

Risk on

Within stock ETFs, net flows for cyclical sectors generally outperformed defensive sectors. This coincided during Q2 with cyclical sectors like tech (big tech in particular) and communication services outperforming the broad market in terms of price performance.

Among the 11 stock market sectors, sector-focused flows were dominated by communication services ($1.8 billion) and consumer discretionary ($1.8 billion), while commodity-sensitive sectors energy (−$6 billion) and materials (−$2.5 billion) led outflows in Q2 (see US sector ETF flows chart). Of note, the energy sector has seen sizeable outflows in 4 of the last 5 quarters.

The chart is described in the text above the chart
Source: Bloomberg as of 06/30/2023.

The current passes bond ETFs

During Q1, it was fixed income (e.g., bond ETFs) that attracted the most flows. The stronger flows for stock ETFs in Q2 pushed fixed income ETFs to the back of the boat. With that said, bond ETF flows have been reliably strong, relatively speaking, for 5 straight quarters (see ETF flows by quarter chart below). However, they have decreased a bit the last 2 quarters—a trend that may be worth watching.

The chart is described in the text above the chart
Source: Bloomberg, as of 06/30/2023.

Among bond ETF flows, aggregate and government bond ETFs continue to see strong demand this year, although the government category slowed noticeably during Q2. Another trend is the lack of interest in inflation-protected bond ETFs—given how prevalent inflation worries have been among many investors (see Q1 vs Q2 fixed income ETF flows by category chart below). In fact, inflation-protected bond ETFs have had net outflows during the entire first half of 2023.

The chart is described in the text above the chart
Source: Bloomberg, as of 06/30/2023.

Mutual fund to ETF conversions

The mutual fund to ETF conversion trend has continued into 2023, with many more converting during Q2. Looking at a longer period of time, 48 mutual funds with over $60 billion in assets have been converted to ETFs since 2021.

Many more are expected to convert in the coming quarters, given some advantages. The converting funds can bring over their track record and assets, unlike a newly launched ETF. The converted funds may also provide potential tax efficiency and a reduction in management fees due to the ETF structure, making them more attractive to some investors.

ETF momentum

Fidelity recently completed its first mutual fund to ETF conversion in June 2023.

Interested in ETFs?

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.

Find the right ETF for you

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

Screen ETFs now

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.

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 The S&P 500® is a market-capitalization-weighted index designed to measure the performance of 500 large-cap US companies.

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 07/20/2023. 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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