Understanding market momentum can be useful for investors. Fund flows, the ebbs and flows of the nearly $2.3 trillion market for U.S.-listed exchange-traded products (ETPs), can offer valuable insight into which parts of the market may have the wind at their back—or in their face.1
According to BlackRock’s® latest quarterly iShares “Follow the Flow” report, the last few months saw some significant ETP flows which may be of interest if you utilize trends and patterns in your investing strategy.
How you can use fund flow data
Fund flow data can help identify trends that reveal where investors are choosing to allocate their money. The fund flow data below represents ETP flows and not mutual funds, and is representative of what all investors are doing—including institutions, advisors, and individuals. ETPs include exchange-traded funds (ETFs), as well as exchange-traded notes (ETNS), but ETFs account for most ETP assets. While we focus on ETP flows here, investors might also examine mutual fund flows to identify trends as well.
It is possible to examine fund flow information from a variety of perspectives. For example, if you have a longer-term investing outlook (i.e., five years or more), it may be helpful to look at annual ETP fund flow data to get a sense of longer-term trends. Investors with a shorter-term outlook might also benefit from analyzing trends in weekly, monthly, or quarterly fund flow information. In addition, you can assess fund flows by asset category, region, objective, and other characteristics.
Longer-term flow trends
From July 1, 2015 to July 1, 2016, more than $200 billion flowed into ETPs. Roughly $85 billion went to U.S. equity ETPs (equity funds are mostly composed of stock investments) and $80 billion to fixed income ETPs (fixed income funds are mostly composed of bond investments). Investors might use this absolute amount of flows to identify broad trends.
During the first two quarters of 2016, net inflows slowed overall compared with the last quarter of 2015—when there was a big spike in U.S. stock ETP flows (see U.S. domiciled ETP Summary, below). Fixed income funds accounted for much of the inflows this year thus far.
Another trend that was apparent over the past 12 months is the flight to perceived safe-haven funds during periods of market turbulence.
Volatility resurfaced in late August 2015, boosting flows to global fixed income funds and causing outflows from equity funds. That trend was even more apparent in early 2016, when the S&P 500® hit a near-term low (see Global equity v. fixed income ETP flows, below). This past June, fixed income flows were relatively strong; however, unlike the previous two bouts of volatility, equity flows also remained strong.
Q2 flows impacted by volatility
Looking underneath the hood of second-quarter fund flows, Brexit shook things up. Developed market fund flows (ex-U.S.) ground to a halt, and there was a general move toward broad exposures and perceived safe-haven funds (see Q2 2016 broad asset class flows).
As an example of this move toward broad exposure within each asset class, of the $14.1 billion that fixed income ETPs took in, broad market fixed income accounted for more than half of those inflows ($8.1 billion). Municipal ($1.7 billion), inflation protection ($1.7 billion), sovereign ($1.7 billion), and corporate funds ($1 billion) comprised the rest of the fixed income inflows. Investors might assess the composition of flows in each category to identify trends within an asset class.
Another dynamic that played out last quarter was the convergence of cyclical and defensive stocks following Brexit. Cyclical stock fund flows plunged after the June 23 referendum vote, as investor sentiment went from risk-on to risk-off very quickly, and defensive stock fund flows appeared to capitalize in the latter half of June.
Defensive sector fund flows had been on a downslope through the first half of Q2, but began to rebound well in advance of the Brexit vote when they spiked higher (see Q2 2016 U.S. sector flows).
While there remains much uncertainty as to the implications of the Brexit vote—along with a variety of other factors, including slow global growth expectations, diverging central bank policy actions, and the forthcoming U.S. presidential election in November—recent fund flows indicate that investors have been willing to take on more risk through the first several weeks of 2016’s third quarter. Over the past three weeks, U.S. stock and emerging market funds have taken in the most money.
Of course, you should not take action based on any one piece of information, including fund flow data. However, fund flows can be a useful tool to help identify market trends to see where investors are broadly putting their money.
Past performance is no guarantee of future results.
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