Q1 ETF flows: stock fund demand slows

While still positive, ETF demand cooled down from its record-setting pace.

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Key takeaways

  • After a record-setting year, total ETF demand slowed down in Q1.
  • US ETF demand cooled dramatically last quarter amid upticks in volatility.
  • Meanwhile, appetite for global ETFs remained strong.

It was going to be difficult for exchange-traded funds (ETFs) to match 2017's record-setting year of demand. Perhaps that is partly why, in the wake of skyrocketing demand last year across nearly every category, ETF net flows (inflows less outflows) for US-based exchange-traded products (ETPs)—which are composed almost entirely of ETFs*—decelerated dramatically during the first quarter of 2018.

Find out what other trends took place among ETFs at the outset of 2018.

A high bar

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.

ETP assets under management (AUM) surged to $3.4 trillion by 2017's end, boosted by a record $470 billion in cumulative net new money. Last year, demand for ETFs was driven primarily by a constructive backdrop for US stocks: a synchronized and broad global economic expansion, and historically low levels of US stock market volatility.

While US-based ETFs still had a positive first quarter, taking in $60 billion in net flows, that is down more than 57% from the $114 billion in net flows during the fourth quarter of 2017, according to BlackRock's most recent quarterly Follow the Flow report. BlackRock attributes the slowdown in momentum for ETF demand to a volatile Q1 backdrop, citing factors such as trade tensions between the US and China, rising rates, and bearish headlines from large tech stocks in particular.

US slows, international shines

Most of the dropoff in demand can be attributed to weaker demand for US equity (i.e., stock) ETFs, which got off to a strong start in 2018, mirroring the market rally that sent stocks to all-time highs.

However, late January/early February volatility caused ETF demand to wilt (see ETP flows slow down). In total, US equity ETFs added just $0.5 billion during the first quarter (see Q1 broad asset class flows). That compares with a $79 billion gain during the fourth quarter of 2017.

Within US stock funds, cyclical stock ETFs attracted more flows than defensive stock ETFs, as financials were the strongest sector by flows (see US sector flows). Real estate and health care saw the largest outflows.

Meanwhile, international stock ETFs continued to attract investors. Buoyed by sustained global earnings momentum, developed market (DM)/global equity ETFs accumulated $25 billion in flows (see International stock ETP flows). BlackRock notes that relatively low-cost international stock ETFs saw the most net flows.

Of note, emerging market stock ETFs attracted $16 billion in net flows during the first quarter, easily topping the 2017 quarterly average of $11 billion.

Bond ETFs keep pace

Like stock ETFs, bond ETFs had an excellent 2017—gathering a record $123 billion in net flows. During the first quarter, bond ETFs continued their ascent, albeit at a more measured pace compared with last year. Strong demand for broad market and US government ETFs contributed to a more than $15 billion gain in net flows (see Bond ETFs keep momentum going).

Among US government bond ETFs, short-term bond ETFs accumulated more than $6 billion in flows, while long-term bond ETFs saw $0.3 billion in outflows amid changes in volatility and shifting interest rate expectations (see US government bond ETF flow).

A notable trend change occurred in corporate bond ETFs (the leading fixed income category last year), which saw an $8 billion net outflow during the first 3 months of 2018. Nearly all of the outflows were among high-yield and investment-grade corporates.

Gauging ETF momentum

Of course, historical trends are not necessarily a harbinger for the future. Moreover, you should not 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 interested in exploring the ETF market, 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 funds' objectives, fundamentals, technicals, performance, volatility, trading characteristics, tax considerations, and analyst ratings.

Next steps to consider

Find new investing ideas and get up-to-the-minute market data.

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* All the data presented within are from the BlackRock iShares Capital Markets Follow the Flow 2017 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.

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. 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.

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.
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