2016 was another banner year for exchange-traded funds (ETFs). U.S.-based exchange-traded products (ETPs)—mostly ETFs and a smaller number of exchange-traded notes—amassed a record $288 billion in cumulative flows (money into these funds minus money out) last year. That brings total U.S.-based ETP assets to an all-time high of $2.5 trillion, affirming that investors continue to seek out ETFs as a way to implement their strategies.
Why follow fund flows?
Tracking fund flows is a popular way of assessing 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, for example, you might look at annual trends. If you have a shorter investment horizon, you might track weekly, monthly, or quarterly fund flows.
U.S. stock funds soar
After a solid first half, demand for ETPs accelerated in the third quarter, as investors increasingly sought out U.S. equity (i.e., stock) funds and fixed income (i.e., bond) funds. Then, fund flows took off like a rocket ship post-election, with 56% of the entire year’s cumulative flows occurring after November 8 (see U.S. Domiciled ETP Summary chart).
After a pullback in the early part of 2016, demand for U.S. stock funds picked up beginning in July, then accelerated post-election, hitting $166 billion by the end of the year—more than all other categories combined.
The U.S. presidential election and Federal Reserve’s December rate hike were inflection points for different sectors. Earlier in the year, as investors fretted over Brexit and the looming presidential election, defensive sector fund flows outperformed. After the election, and the December rate increase, demand for cyclical sector funds surged—with financials and industrials accounting for more than $17 billion in cumulative flows during the fourth quarter (see U.S. Sector Cumulative ETP Flows for 2016 and Q4 below).
Globally, ETP flows were mixed in 2016. Developed markets (e.g., countries like the United States, Canada, many European countries, Australia, and Japan) accrued $22 billion in cumulative stock fund flows. Brazil ($1 billion) and Russia ($255 million) were bright spots in the developing markets group.
However, geopolitical events negatively impacted several international markets during the year. For instance, European stock funds saw outflows (i.e., more money leaving funds than coming in) of $26 billion in 2016 (see International equity ETP flows table), mostly due to strong outflows before and after Brexit. The Asia-Pacific region (APAC) saw outflows of $10 billion last year. To wit, Japan (-$10 billion) and China (-$2.2 billion) funds had more money leaving than coming in.
While stocks had their ups and downs, bond funds got off to a strong start and maintained their momentum throughout the year. In fact, the $85.1 billion in cumulative fixed income flows represents a new all-time annual record (see Fixed Income Chart Summary table).
Flows were led by broad market bond funds ($29 billion) as well as corporate bond funds ($23 billion). Within the U.S. corporate bond fund market, investors sought out high-quality bonds, as evidenced by the $16 billion in flows for investment-grade bond funds (see U.S. Corporate ETP Flows chart).
Continuing last year’s uptrend, all U.S.-based funds have continued to attract investors. However, demand for cyclical sectors has moderated somewhat as more defensive sectors like health care have ranked among the top areas for net flows. Bond flows have been mostly flat over the last several weeks, with one exception being demand for inflation-protected bond funds. TIPS (Treasury Inflation-Protected Securities) ETPs have accumulated more than $2.3 billion in flows since the U.S. presidential election.
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, fund flows can be a useful tool to help identify market trends to see where investors are broadly putting their money.
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