2017 ETF trends

ETF flows hit record highs. Picking up steam in Q4: financials, tech, industrials.

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Key takeaways

  • ETF assets surged to another all-time high in 2017.
  • ETF net new money topped 2016's record numbers, with broad-based gains across asset classes and regions.
  • Heading into 2018, financials and technology had the most momentum among US-based stock ETFs.

2017 was another record-setting year of net flows (inflows less outflows) for exchange-traded funds (ETFs). According to BlackRock's year-end Follow the Flow report, exchange-traded products (ETPs)—which are composed almost entirely of ETFs1—rose to a record high of $3.4 trillion assets under management (AUM) by year end.

Here's a look at where the ETF momentum was in 2017, as well as where it could be heading in 2018.

Setting a new pace

Why follow fund flows?

Tracking fund flows can help you evaluate which parts of the market may have momentum, and can be particularly 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.

As the stock market hit all-time highs last year, so too did ETF flows. During 2017, US-based ETFs added $470 billion in cumulative net new money, easily besting the previous annual record of $285 billion set in 2016. The increased appetite for ETFs was spurred by the constructive backdrop for US stocks: a synchronized and broad global economic expansion, and historically low levels of US stock market volatility.

US stock ETFs got off to, and ended on, excellent notes, accumulating $59 billion during the first quarter of 2017 and $79 billion during the fourth quarter (see 2017 US-domiciled ETP summary by asset class). For the full year, US stock ETFs gained $180 billion in net new flows.

Developed market (DM) ex-US stock ETFs had impressive flows as well, with a record $118 billion in net flows in 2017, versus only $4 billion in 2016. Emerging markets (EM) trailed the US and developed markets ex-US in terms of flows. However, EM ETFs still added a robust $42 billion last year.

Within the US stock ETF universe, the financials and technology sectors had the most momentum in Q4, and also for the full year. Financial ETFs gathered more than $4 billion and technology ETFs accrued over $3 billion in net flows during the fourth quarter (see US sector flows: Q4 2017 vs. full year 2017).

For the year, cyclical sectors as an overall group outpaced defensive sectors, with only the utilities, telecom, and consumer staples sectors incurring net outflows. Also of note, health care funds had a sizeable outflow during the fourth quarter ($1.8 billion in new outflows).

International stock ETF funds were also in demand last year, accumulating more than $100 billion in flows (see 2017 international equity flows). Among developed markets, Asia Pacific (APAC) funds gathered $4 billion in flows, and while European funds accumulated roughly $10 billion for the full year, they incurred net outflows during the second half of the year.

Emerging market flows were strong last year, likely aided by higher stock market returns than the US and other developed markets. Broad/regional emerging market stock funds pulled in $38 billion in flows for the year, and single country emerging market stock funds accrued a relatively strong $4 billion—especially compared with anemic flows in prior years.

Bond ETFs shined too

Bond ETFs continued their steady asset rise, accumulating $123 billion in net flows during 2017. That follows increases of $55 billion in 2015 and $84 billion in 2016.

Corporate and broad market bond ETFs accounted for the vast majority of bond ETP flows last year (see 2017 bond ETP flows), compared with a more evenly distributed increase across credit qualities, investment grades, and yield categories in previous years.

Gauging ETF momentum

Many of the trends that prevailed in 2017 have spilled over into 2018. Through the first several weeks of the year, investors have continued to buy US and international stock ETFs, as well as bond ETFs, as US and global markets set new all-time highs.

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.

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