Bond ETFs win again

Fixed income exchange-traded funds had the most momentum last quarter.

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Key takeaways

  • Demand for ETFs remains healthy.
  • Bond ETF assets surged past $1 trillion.
  • Sustainable ETF flows had their best quarter yet.

As several global stock markets reach new all-time highs, it's bond funds that continue to steal the spotlight among exchange-traded fund (ETF) flows. That strength in bond ETFs has helped drive total ETF assets under management (AUM) to another record high, according to BlackRock's most recent quarterly Follow the Flow report.*

Here are the latest developments in the ETF universe.

ETF assets near $4 trillion

Net flows (inflows minus outflows) for US-based exchange-traded products (ETPs)—which are composed almost entirely of ETFs—kept up their record-setting ways during the second quarter (Q2).

US-domiciled assets under management rose to an all-time record high above $3.9 trillion, as of the end of June. $120 billion in net flows through the first 6 months of the year represents a strong first half, relative to prior years. That includes $66 billion in net flows during Q2 (see US-domiciled ETP flows chart).

While being outshined once again by bond ETF flows, US equity (i.e., stock) ETFs posted another positive quarter, accumulating $26 billion in net flows. Developed market (DM)/global equity bounced back from a first quarter of outflows by taking in $6 billion in net flows during Q2.

It is worth noting that, while total ETF inflows last quarter and year to date are strong relative to historical levels, they did decline from near-record flows at the end of 2018.

Bond ETFs set record

As has been the trend lately, bond ETFs led the pack during Q2. Buoyed by the largest monthly inflows on record for fixed income (i.e., bond) ETFs in June ($25 billion), bond ETFs have gathered $72 billion of inflows thus far in 2019. This momentum has pushed global bond ETF assets over $1 trillion (although that still represents less than 1% of the global fixed income market).

Corporate bond ETFs remain the primary source of strength for bond ETFs—concentrated primarily in investment grade and high yield (see US investment grade and high yield ETP flow chart). One reason why some investors are seeking out investment grade bond ETFs, in particular, may be a flight to quality over lingering concerns about global growth.

Another area of the bond ETF space that has had momentum this year is US Treasuries. Intermediate-term bond ETFs continued to gather inflows, along with long-term bond ETFs. Even short-term bond ETFs, which had mostly negative flows thus far this year prior to June, experienced positive flows toward the end of Q2 (see US Treasury ETP flow chart).

Sustainable, factor trends

There were other notable trends in ETFs last quarter. For example, sustainable investing ETFs had, by far, their best quarter ever for flows during Q2. The $2.8 billion in net flows that sustainable ETFs accumulated during Q2 is more than double the prior best level set the previous quarter.

Also, among factor-based ETFs, there was a slowdown in flows from a record high during the first quarter of 2019. Additionally, there was a noticeable shift to defensive positioning, as minimum volatility ETFs were the overwhelming leader for flows among factor ETFs during Q2.

Exploring the ETF universe

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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