ETF flows weaken again

Exchange-traded fund flows still can't keep up 2017 pace.

  • Fidelity Active Investor
  • Idea Generation
  • Trading
  • Active Trader Pro
  • Brokerage
  • Exchange-Traded Funds
  • Stocks
  • Idea Generation
  • Trading
  • Active Trader Pro
  • Brokerage
  • Exchange-Traded Funds
  • Stocks
  • Idea Generation
  • Trading
  • Active Trader Pro
  • Brokerage
  • Exchange-Traded Funds
  • Stocks
  • Idea Generation
  • Trading
  • Active Trader Pro
  • Brokerage
  • Exchange-Traded Funds
  • Stocks
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

Key takeaways

  • Flows into exchange-traded funds (ETFs) continue downshift at a slower pace relative to 2017.
  • However, ETF net assets set a new all-time high last quarter.
  • Bond ETF flows remain strong.

If there was any concern that the allure of ETFs has dulled somewhat, relative to 2017's record-setting pace, data from the second quarter did not allay those fears. Q2 net flows (inflows minus outflows) for US-based exchange-traded products (ETPs)—which are composed almost entirely of ETFs—were slightly below those of the first quarter. That's according to BlackRock's most recent quarterly Follow the Flow report.

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.

This marks the second straight quarter of net flows that were dramatically below the pace set last year. With that said, it was going to be difficult for ETF flows to match 2017, when a synchronized and broad global economic expansion, and historically low levels of US stock market volatility, helped drive demand for the stock market in general—and ETFs in particular.

Nevertheless, 2018's ETF flow slowdown may provide insights into some aspects of the market that are causing investors unease. Here's a look at what happened among ETFs last quarter.*

ETF flows in context

Through the first half of 2018, ETFs have had inflows of nearly $118 billion (see US-domiciled ETP flow summary). That is well behind last year's pace, which saw ETFs accumulate nearly $246 billion in flows by this point in 2017. BlackRock cites trade wars and a potentially overheated market as primary causes behind the dramatic slowdown in flows relative to 2017.

While it is true that demand for ETFs has slowed thus far compared to last year, inflows for 2018's first half would put it on par, or ahead, of just about any other year. Moreover, ETP assets under management (AUM) continue to set new all-time highs, reaching $3.51 trillion, as of the beginning of July.

A primary trend among ETFs during Q2 was a shift away from non-US developed/emerging market equity (i.e., stock) funds and toward US equity funds. Flows for US equity funds improved quarter over quarter from $0.5 billion to $33.8 billion. Meanwhile, emerging market (EM) equity funds had $8 billion in net outflows, perhaps due to concerns that trade wars would hurt economic activity in those countries to a greater extent than the US.

As the emerging market flows chart below reveals, BlackRock points to a rebound in the US dollar in mid-April as a possible inflection point for emerging market ETF flows. In the months prior to that, flows were volatile, but mostly positive. Since then, EM flows have been almost entirely negative, mostly due to outflows among broad/regional emerging market equities.

Bond funds stay strong

While equity funds have been up and down this year, the fixed income (i.e., bond) fund train keeps on rolling. After gathering an annual record $123 billion in net flows during 2017, fixed income funds added another $15 billion during the first quarter of 2018 and $30 billion last quarter (see Fixed income ETP flow summary).

Fixed income ETP flow summary
  Q3 2017 Q4 2017 Q1 2018 Q2 2018
Broad market $8.3bn $11.3bn $9.5bn $3.9bn
Inflation $0.9bn $2.2bn $1.9bn $2.4bn
Corporate $13.1bn $4.3bn ($7.3bn) $9.5bn
Municipal $1.2bn $1.9bn $0.7bn $2.0bn
DM sovereign $0.0bn $0.1bn $0.2bn $0.0bn
EM debt $0.3bn $1.5bn $1.9bn ($0.6bn)
US government $8.2bn $1.1bn $8.6bn $13.0bn
Grand total $31.9bn $22.4bn $15.5bn $30.3bn

Appetite for shorter duration Treasury products surged again, relative to prior quarters, and corporate fixed income net flows reversed from the first quarter outflow of $7 billion to net inflows of $10 billion in the second quarter (see the chart to the right).

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 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.

Learn what you need to know before trading the market.

Discover ETF strategies that might fit into your investing plan.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print
* 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.

Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular or, if available, a summary prospectus containing this information. Read it carefully.

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.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

854159.1.0
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.