ETF flows: Bond funds roll

Fixed income ETFs propelled fund flows to another positive quarter.

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Key takeaways

  • ETF fund flows had yet another positive quarter.
  • Bond ETFs led the way, continuing a multiyear trend for this group.
  • While still positive, sequential ETF fund flow growth has slowed substantially.
 

Amid the best quarter for the S&P 500 since 2009 (and the best start to the year for US stocks since 1998), it was bond funds that helped push ETF assets to another record high. That's according to BlackRock's most recent quarterly Follow the Flow report.*

Here are the latest developments in the ETF universe.

Bond ETFs provide cover

Net flows (inflows minus outflows) for US-based exchange-traded products (ETPs)—which are composed almost entirely of ETFs—totaled $54 billion in the 1st quarter (Q1) of 2019. While that is in range of the $60 billion in net flows during Q1 of 2018, it was down sharply from net flows of $102 billion during Q4 2018 and $87 billion in Q3 2018 (see US-domiciled ETP flow summary).

US equity ETF flows, frequently the source of the largest net inflows in prior years and quarters, had a volatile first 3 months of 2019. By mid-February, US equity ETFs had incurred more than $20 billion in net outflows. But a March rally erased that, and by quarter-end US equity ETFs had accumulated $11 billion in net inflows.

Even though sequential fund flows slowed dramatically, ETP assets under management (AUM) hit another all-time record high of $3.8 trillion. Strong demand for fixed income (i.e., bond) ETFs—a persistent trend for multiple quarters—covered up a nearly $9 billion net outflow in developed market (DM) and global equity (i.e., stock) ETFs. Bond ETFs saw their largest inflows since Q1 2017.

Persistent positive bond ETF flows have been a multiyear trend. Last quarter, it was a surge in demand for corporate and US government bond ETFs (see Fixed income ETP flow summary) that helped pushed this group to the top.

Corporate bond inflows soared during Q1, accumulating $22 billion in inflows, after an $8 billion outflow during the last quarter of 2018. A shift in risk sentiment supported demand for investment grade and high yield corporate bond ETFs (see US corporate ETP flows).

US government bond ETFs were notable as well during Q1. In fact, they have consistently attracted inflows in recent quarters: US Treasury ETFs jumped 84% in 2018. BlackRock noted a particular investor preference for extended duration, as assets have rotated out of the front end and into longer dated Treasuries.

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.

Elsewhere, demand for broad market ETFs—while still positive—softened somewhat from previous years. International developed market ETFs—which incurred a $9 billion net outflow to start the year—were hit by some weak economic data and political uncertainty surrounding Brexit, helping drive investors to be net sellers.

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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