Fund flows: 2016 in review

Demand for ETFs set another record as investors sought out U.S. stock funds—especially after the election.

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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.

Sector flows

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).

International funds

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.

Bond funds

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).

Recent trends

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.

Learn more

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Past performance is no guarantee of future results.
1 Source: BlackRock iShares Capital Markets “Follow the Flow” report.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
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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