ETF funds regain their mojo in Q3

Fund flows returned to levels reached during 2017’s record-setting pace.

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Key takeaways

  • Third quarter (Q3) flows into exchange-traded funds (ETFs) picked up dramatically.
  • ETF net assets set another all-time high.
  • Bond ETF flows, while smaller than stock ETF flows, continue to be more stable.

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.

During the past 3 months, investors sought out ETFs at a level similar to most of 2017's record-setting pace. This follows a couple of significantly slower quarters around the turn of the year. That's according to BlackRock's most recent quarterly Follow the Flow report.*

Here are the latest developments in the ETF universe.

ETF flows bounce back

Q3 net flows (inflows minus outflows) for US-based exchange-traded products (ETPs)—which are composed almost entirely of ETFs—totaled $87 billion, up from $59 billion the prior quarter and $60 billion in Q1 (see US domiciled ETP flow summary).

The pace of ETF flows had slowed substantially in prior quarters, perhaps due to a slowdown in the rate of increase for global stock prices relative to much of 2017—when a synchronized and broad global economic expansion, and historically low levels of stock market volatility, helped drive demand for the stock market in general, and ETFs in particular.

While Q3 was nowhere near the massive $141 billion in net flows during the last quarter of 2017, it was in line with most of the other quarterly net flows for that record-setting year. Total ETF assets under management (AUM) are now at another all-time high of $3.7 trillion.

Digging deeper

Among asset classes, US equity (i.e., stock) ETFs garnered the most net flows at $60 billion. Within sectors, technology was the leader in net flows, gaining nearly $7 billion, despite volatile price performance for tech stocks. The reorganization of sector classifications, which impacted the technology, telecom, and consumer discretionary sectors, appeared to have little impact on sector flows. Health care fund flows followed technology at the top, spurred on by new drug developments and a better than feared "Drug Pricing Blueprint" from the White House, according to BlackRock.

International stock fund flows were a mixed bag. While global ETF funds accrued over $6 billion in net flows, outflows were seen in APAC (Asia-Pacific) and European ETFs (see International equity ETP flows: Q3 2018). Some of that weakness is attributable to Japan. Despite Japanese equities hitting 27-year highs in September, net flows for ETFs of the island nation have remained negative.

Elsewhere, emerging market ETF flows were positive in Q3, following fairly significant outflows during Q2 amid growing trade frictions with the US. However, the pace of inflows was dramatically lower than the first quarter, and there appears to be less conviction for emerging market funds based on flows, compared with 2017, as tariff talk lingers over the market. Interestingly enough, China—which has been a primary target of US tariff talk—was a source of strength for ETF flows, gaining $4 billion in Q3—perhaps due to lessening fears of a trade war.

Bond ETFs

Fixed income (i.e., bond) ETF flows, which have been more consistent over the past several years relative to stock funds, gained $22 billion during Q3, following net flows of $30 billion in Q2, $16 billion in Q1, and $22 billion in the last quarter of 2017 (see Fixed income ETP flow summary). Indeed, bond ETFs have not had a quarter of outflows since 2013.

Corporate, US government, and broad market funds continue to be the main draw among bond ETFs. This consistency has continued even as rates rise, inflationary pressures increase, and some global central banks take diverging actions.

Exploring the ETF universe

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.

Next steps to consider

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* All the data presented within are from the BlackRock iShares Capital Markets Follow the Flow report. 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.
Past performance is no guarantee of future results.

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.

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