- Net ETF flows registered their second highest annual amount ever in 2018.
- Relatively low-cost ETFs remain in favor.
- There are numerous ETF opportunities across asset classes, geography, and other factors.
While the S&P 500 suffered its first annual decline last year on a total return basis since 2008, US-based exchange-traded products (ETPs)—which are composed almost entirely of exchange-traded funds (ETFs)—posted another year of outstanding net flows (i.e., inflows minus outflows). That's according to BlackRock's 2018 Follow the Flow report.*
Indeed, ETF net flows totaled $308 billion last year (see Cumulative 2018 ETP flows). Even though that was down sharply from the record-shattering $470 billion in flows set the prior year, 2018 still registered as the second highest annual total ever. Relatively low cost equity ETFs continued to dominate, as more than 95% of new assets flowed into those with expense ratios of 20 basis points (i.e., 0.20%) or less.
Here's a closer look at ETFs that had the most momentum at the start of 2019, and some ideas to consider.
US flows strengthen amid turbulence
2018 was bookended by volatility, beginning with a stock market correction in January/February and ending with another in December. Synchronously, ETF flows struggled to gain traction through the first several months of the year as markets searched for direction. As the year unfolded, ETF flows broadly strengthened along with the stock market, led by US equity (i.e., stock) and fixed income (i.e., bond) ETFs for the second straight year.
The 3 largest US equity ETFs by net assets, as of January 23, 2019, are:
- SPDR S&P 500 ETF (SPY)
- iShares Core S&P 500 ETF (IVV)—available commission-free online at Fidelity.com.
- Vanguard Total Stock Market ETF (VTI)
When volatility struck again in December, however, ETF flows were undeterred. By year end, $24 trillion in total value of ETFs were traded.
There was significant divergence between US cyclical sector ETFs (+$17.8 billion) and defensive sector ETFs (–$12.7 billion) during the year. Notably, health care—the top performing sector in 2018 with a roughly 5% gain—attracted the most inflows ($6.2 billion).
The 3 largest US equity health care ETFs by net assets, as of January 23, 2019, are:
- Health Care Select Sector Fund (XLV)
- Vanguard Health Care ETF (VHT)
- iShares Nasdaq Biotechnology ETF (IBB)—available commission-free online at Fidelity.com.
Meanwhile, financials—the leading asset gatherer among sectors in 2017—saw the most outflows (–$8.4 billion) last year, pressured in part by a flattening yield curve.
Around the globe, ETF flows were a mixed bag. Global developed market ETFs registered another strong year with $37 billion in net flows, while Europe and the Pacific region incurred net outflows (see International equity ETP Flows). Emerging markets fared better, with broad/regional emerging market equity ETFs gathering $17 billion in assets.
The 3 largest international equity ETFs ex-US by net assets, as of January 23, 2019, are:
- Vanguard FTSE All-World ex-US ETF (VEU)
- iShares Core MSCI Total International Stock ETF (IXUS)—available commission-free online at Fidelity.com.
- Vanguard Total International Stock ETF (VXUS)
Like stock ETFs, it was another stellar year for bond ETF flows. Net fixed income flows nearly reached $100 billion (see Fixed income ETP flow summary).
Bond ETF flows were led by US Treasury ETFs—particularly short-maturity bond ETFs, which appear to have benefited from 4 rate hikes by the US Federal Reserve in 2018. Indeed, short-term US Treasury ETFs gained $37 billion in net flows, a record increase from $7.9 billion in 2017. Broad market fixed income ETFs also had a strong year, gaining $28 billion in new flows.
The 3 largest fixed income ETFs by net assets, as of January 23, 2019, are:
- iShares Core US Aggregate Bond ETF (AGG)—available commission-free online at Fidelity.com.
- Vanguard Total Bond Market ETF (BND)
- iShares IBoxx $ Investment Grade Corporate Bond ETF (LQD)—available commission-free online at Fidelity.com.
Why follow fund flows?
If you are interested in exchange-traded funds (ETFs), one tool that may be of use is Fidelity's ETF screener that can quickly sort through a lot of data based on choices you make, to help you identify specific investments. 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.
If you think one or more of the ETFs identified by a screen is one you want to consider to help manage the risk in your portfolio or achieve your objectives, your next step should be to research it further.
Also, trading costs are among the many factors that you should analyze when considering an ETF. Factoring in the impact of commissions, for example, can be particularly relevant for active investors who trade somewhat frequently—especially if you are making relatively small-sized trades—as well as long-term investors executing a dollar cost averaging strategy.
In addition to commissions, a few other key factors to consider for any ETF (which you can find on Fidelity.com, on an ETF's snapshot page) are:
- Expense ratio: Look for low expense ratios to reduce your overall costs.
- Bid-ask spread: Look for small bid-ask spreads to reduce costs of investing.
- Tracking error: Look for a low tracking error to find ETFs that indicate a better job of replicating their benchmark indexes.
If you find ETFs with similar objectives, you could compare their expense ratios, bid-ask spreads, and/or tracking error to find the better deal. You can filter for all of these factors using the ETF screener.
Knowing what the individual components of an ETF are can also give you a better sense of what you are buying or selling. You can find an ETF's components on its ETF snapshot page on Fidelity.com, under Portfolio Composition. On this page, you can find the ETF's style (value, growth, or blend) and size (large, mid, or small), as well as analyst ratings and key statistics.
Finally, you should fully understand the risks involved in any investment strategy. Any investing opportunity should be considered within the context of a well-diversified investment strategy that conforms to your specific time horizon, objectives, and risk parameters.
Next steps to consider
Find ETFs and ETPs that match your investment objectives.
Learn what you need to know before trading the market.
See the range of available Fidelity Funds and learn the benefits of each asset class.