Where the money is flowing

Brexit tilted fund flows toward defensive investments during the second quarter.

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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).

Looking ahead

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.

Learn more

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Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular, or, if available, a summary prospectus containing this information. Read it carefully.
1. Source: BlackRock iShares Capital Markets “Follow the Flow” report.
For iShares® ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation can be found in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc., and its affiliates.
Effective September 30, 2013, any eligible iShares ETFs purchased commission free must be held for a minimum of 30 calendar days, or a short-term trading fee will apply.
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.

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