Fund flows: September update

Strong flows persisted for U.S. ETP funds in recent months, while international funds saw mixed results.

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If you use trends in your analysis, the money going into and out of the nearly $2.4 trillion market for U.S.-listed exchange-traded products (ETPs)1—is one tool that you can use to see what segments of the market may have momentum.2 Exchange-traded funds (ETFs) represent the vast majority of ETPs, which also include exchange-traded notes (ETNs).

Fund flows can be useful as they may highlight a swing in momentum or shifts in sentiment, which can be important indicators for shorter-term investors to help determine where to allocate their money. Blackrock's Sean Carney, head of municipal strategy, has stated that fund flows have an outsized impact on various segments of the market, thus meriting analysis.

According to BlackRock’s September 8 iShares® “Follow the Flow” report, money continued to flow over the past several months into U.S.-listed ETFs, particularly bond funds, but international funds had mixed results. Broad global stock ETPs in developed markets (DM) and emerging markets (EM) attracted money, but Europe stock ETPs saw outflows. Commodities ETPs also had some outflows, led by gold and oil.

Longer-term fund flow trends

Net flows (e.g., money coming in minus money going out) into U.S.-listed ETPs have hit $138.1 billion year to date. That has helped drive U.S. ETP assets to a record $2.4 trillion (see U.S. domiciled ETP summary chart below). Fixed income (i.e., bond) funds have attracted the biggest money flow this year, followed by U.S. stock funds.

Nevertheless, there have been some weak spots. Global developed-market stock ETPs have had net outflows (e.g., more money going out than money coming in) of nearly $13 billion year to date, and net inflows slowed overall during the first half of 2016, compared with the last quarter of 2015.

Recent ETP trends

One trend that has been ongoing since the start of the year, and has accelerated whenever market volatility spiked higher, is investors seeking out perceived safe-haven funds. For example, bond fund flows have exhibited significant momentum year to date, and that trend has continued in recent months (see chart above).

Within the bond fund-flow world, investment grade ETPs (e.g., bonds that are considered strong quality—e.g., rated BBB+ and above) generated nearly $8 billion in flows over three months prior to September 8, 2016 (see U.S. corporate ETP flows chart). High yield (e.g., investments that make relatively large percentage distributions to investors) had a bumpier ride over the same time frame; however, investors’ search for yield has helped this category take in nearly $2 billion in cumulative net flows.

Among government bond ETPs, blended maturities (bond ETPs that are consisting of bonds with varying maturities) have been the clear choice, and there have been outflows in long-term government bond ETPs (see U.S. government bond ETP flows chart).

While U.S. ETPs have generally experienced strong inflows over the last three months, international flows have been a mixed bag.

Broad/regional emerging-market equity and global developed-market ETPs flows have looked like rising staircases—with inflows of roughly $15 billion and $13 billion, respectively, since early June (see International equity ETP flows chart). On the other hand, investors have been broadly pulling their money out of European ETPs ($5 billion in outflows) as well as Asia Pacific. Single-country ETPs experienced very little change in flows over this time frame.

Commodity ETP flows have gradually increased overall in 2016. More recently, these flows have slightly declined—with most of that weakness attributable to outflows in gold and oil ETPs.

After a spike in demand for gold ETPs in June, cumulative flows for gold ETPs have declined by more than $1 billion since a near term peak in early August (see Cumulative commodity flows chart). For context, gold ETPs have garnered $15.1 billion in net inflows year to date. Oil ETPs have also given up some of their recent gains in flows over the past month or so, and other commodities have generally seen modest gains.

Looking ahead

The early part of September brought a relative increase in volatility, compared with previous months, which may affect where investors recently decided to allocate their money within the ETP universe. With that said, volatility has subsided lately.

Of course, you should not take action based on any one piece of information. However, fund flows can be a useful tool to help identify market trends and momentum.

Learn more

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1. Source: BlackRock iShares Capital Markets “Follow the Flow” report.
2. The fund flow data represents ETP flows and not mutual funds, and is representative of what all investors are doing—including institutions, advisors, and individuals. ETPs include ETFs as well as exchange-traded notes (ETNs), but ETFs account for most ETP assets. While we focus on ETP flows here, investors might examine mutual fund flows to identify trends as well.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP’s shares when attempting to sell them. Each ETP has a unique risk profile that is detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.
Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

Past performance is no guarantee of future results.

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