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).
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.
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 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.
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.
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.
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.