Q3 ETFs: A tale of 2 stories

Trade wars and the search for yield have helped shaped ETF flows in recent months.

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Key takeaways

  • US stock ETF flows gained more momentum last quarter and bond ETF flow strength continued.
  • Trade wars may have spooked emerging market ETF investors.
  • Gold ETFs saw a safe haven bid amid global concerns.

Strong net fund flows (inflows minus outflows) for stock and bond exchange-traded funds (ETFs) helped push US-based ETF assets under management (AUM) toward $4 trillion. Yet trade wars (and their potential to slow economic growth) caused some investors to exit or avoid segments of the ETF universe. That according to BlackRock's most recent quarterly Follow the Flow report.*

Here are the recent developments in the ETF universe.

Stock funds try to keep pace

Total net flows for US-based exchange-traded products (ETPs)—which are composed almost entirely of ETFs—showed no signs of slowing down during the third quarter (Q3).

ETF assets under management rose to yet another all-time record high, as of the end of September 2019. After taking in $120 billion in net flows through the first 6 months of this year, ETFs accumulated another $80 billion last quarter (see US-domiciled ETP flows chart).

Looking under the surface, US stock funds gained momentum, accumulating $48 billion in net flows during Q3. While that trailed total bond fund flows, it is nearly double what stock ETFs took in during the previous quarter ($26 billion). After a downbeat start to the year, US stock funds are on pace to accumulate more than $100 billion in cumulative net flows for 2019—assuming the current trend persists.

Emerging markets suffer from trade wars

Meanwhile, emerging market fund flows have turned negative the last 2 quarters. That follows a robust start to the year for this category, when emerging market funds gathered nearly $20 billion in flows during the first quarter (see Emerging market fund flows chart).

It's possible this trend reflects a broad shift in investors' perception that the trade wars might not resolve favorably—with the potential impact being felt particularly hard in emerging market countries—especially China.

Bond funds still rolling

The rally in bond ETF flows continues. During the second quarter, bond funds surged past $1 trillion in AUM for the first time ever. That momentum did not slow last quarter.

Amid the first rate easing by the Federal Reserve in over a decade, and a yield curve inversion that had many investors worried a recession was on the horizon, intermediate- and long-dated Treasuries amassed relatively huge net flows. Bond ETFs accumulated $109 billion in net flows in Q3—more than any other category once again (see US Treasury net flows chart).

In addition to Treasuries, corporate bond funds were once again boosted by strong net flows. Year to date, corporate bond ETFs have gathered close to $50 billion, just outpacing Treasury bond ETFs.

Last quarter's momentum for bond funds is particularly noteworthy, given the changing dynamics in the bond market (i.e., multiple Fed rate hikes, yield curve inversion, etc.). There is reason to believe that bond prices may not continue their strong gains in 2020. Whether that slows demand for bond ETFs remains to be seen as investors continue to search for yield in this relatively low-yield marketplace.

Commodity ETFs shine

A category that may have benefited last quarter from a bit of global uncertainty was commodities. Gold ETFs in particular drew investors' interest beginning in June, culminating in $8 billion in net flows during Q3 (see US commodity ETF cumulative flows chart).

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.

Some investors view assets flowing into precious metals like gold and silver as risk-off behavior. Trend-following investors may want to monitor these bellwether assets for insights into broad market sentiment.

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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