ETF bond flows set record

During the best quarter for stocks in over a decade, bond ETF flows soared.

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Key takeaways

  • During the first full quarter of the pandemic, positive net bond ETF flows set another record.
  • As stock markets have rallied on historic government and central bank support, stock ETFs continued to attract strong inflows.
  • Commodity ETF flow momentum accelerated in Q2 as gold prices set record highs.

ETF assets under management continue to push well past $4 trillion as the world copes with the COVID-19 pandemic. Momentum behind ETFs was boosted by $130 billion in net fund flows (inflows minus outflows) during the second quarter (Q2), according to BlackRock's most recent Follow the Flow report.*

Here were the recent trends for exchange-traded products (ETPs)—which are composed almost entirely of ETFs.

ETF demand as strong as ever

At the outset of the year, ETF flows were uneven across categories. During Q2, net ETF flows were broadly positive, pulling in the most money since the last quarter of 2019 (see US-domiciled ETP flows chart). Fixed income (i.e., bond) ETFs attracted by far the most positive net flows, reaffirming a multiyear trend that showed some weakness in the first 3 months of 2020.

During Q2, US equity (i.e., stock) ETFs attracted $32 billion in net flows as US stocks had their best quarter in over a decade. One of the few weak spots among ETF flows was developed market ex-US, which shed $9 billion during the quarter.

By sector, US defensive and cyclical ETFs saw inflows of $10 billion and $12 billion, respectively. Info tech ETF net flows were the most positive, totaling $5 billion. Real estate was the only cyclical sector to experience net outflows (−$1 billion). Among defensive sectors, health care ETFs led with net inflows of $6 billion, and energy ETFs totaled $3 billion in net flows.

Bond ETFs set record

After bond ETF flows hit modest turbulence in Q1, investors went right back to snatching up these investments. Bond ETF net flows surged $85 billion, primarily due to a $52 billion increase in corporate credit ETFs and a $21 billion increase in fund flows to broad market bond ETFs.

Within that record-setting corporate credit flow category, investment grade ETFs soared $36 billion and high yield funds added $15 billion (see Corporate credit and high yield lead bond fund flows chart). However, high yield fund flow momentum slowed in more recent weeks, perhaps as coronavirus risks have risen, shedding $5 billion in net flows in the final 2 weeks of Q2 (while investment grade added $9 billion).

US treasury ETF flows were positive, but slowed considerably from their breakneck Q1 pace. US government ETF net flows totaled $3 billion in Q2, down from $24 billion in Q1.

Gold ETF flows follow gold prices

With gold prices recently having broken through the previous all-time high set in 2012, gold ETF flows have corresponded. Commodity ETFs had net inflows of $25 billion last quarter, driven primarily by flows into gold ETFs (see Gold ETP flow chart). Year to date, gold ETFs have had inflows of more than $23 billion (a relatively large amount compared with historical flows for gold ETFs), with more than half of that happening in Q2.

Benefiting from a perception of gold as being a safe haven investment, gold prices have been rising during the pandemic. As of July 14, 2020, gold is trading above $1,800 per troy ounce.

ETF flows in context

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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