Flow & Tell with iShares: Highs and Lows of 2022’s ETF Flows

Aggressive monetary policy, surging inflation, and the outbreak of conflict in Europe delivered a 2022 that was rife with macro and market volatility. We saw historic performance swings as investors navigated these headwinds, and ETFs were often how they did so.


While markets spiraled back down to earth in 2022, ETF usage soared as the investment vehicle of choice amid the volatility. ETFs as a percentage of total equities traded on exchange averaged 32% for the year – a significant step higher than the 25% the previous four years.1

While we’ve grown used to mutual fund outflows within equities – partially due to fund conversions in index products from mutual funds to ETFs – we saw this dynamic play out in the fixed income this year. Outflows from bond mutual funds totaled just over $400 billion, while bond ETFs took in nearly $200 billion.2

Figure 1. ETF & Mutual Fund Flows

Bar chart ETF and mutual fund flows 2018 through 2022

Source: BlackRock, EPFR. ETF and mutual fund groupings determined by EPFR. Universe limited to U.S.-domiciled funds and includes all U.S. equity and fixed income mutual funds that report holdings monthly. As of January 03, 2023.

Chart description: Bar chart displaying mutual fund and ETF flows, from 2018 to 2022. Chart depicts mutual fund outflows in 2022, across both equity and fixed income asset classes. In contrast, ETFs netted inflows in both equity and fixed income strategies.

Flows into both fixed income and equity ETFs remained resilient in 2022, shouldering significant inflows despite a tumultuous market environment. Fixed income ETFs added $199 billion on the year (and iShares set a new record for bond flows!), down only 4% year-over-year, and a sizeable feat on the back of double-digit negative returns in the asset class. Investors were cautious when reaching for yield, favoring U.S. government bonds and investment grade credit over riskier counterparts.

Even as equities sank over 18% on the year, equity ETFs welcomed $402.5 billion in inflows.3 Traditionally defensive sectors reigned, with flows into health care and utilities leading the charge. Still, inflows remained 47% lower than last year’s record. April marked the worst month ever for equity ETFs as the asset class shed $25 billion as a slew of macro headwinds (COVID fears, rising rates, and monetary tightening, oh my!) spooked investors.

Sticky inflation and aggressive monetary policy magnified 2022’s market volatility. In response, investors flocked to safety, translating into record U.S. Treasury ETF inflows. Indeed, U.S. government bonds captured over 64% of all domestic fixed income ETF inflows in 2022, a testament to the year’s risk-off sentiment.

With the Federal Reserve hiking and the yield curve inverting, investors embraced the front-end, opting to shorten duration. Short-term U.S. Treasury ETFs brought in $45.7 billion in the first three quarters, compared to $50.9 billion across all other durations. Q4 bucked the trend, and investors began to allocate across maturities on the anticipation of a rate-hiking plateau, with intermediate and long-term strategies snagging roughly 50% of U.S. Treasury ETF flows.

We often say that ‘flows follow performance’ with regards to ETFs as investors chase returns – meaning the informational value from ETF flows can sometimes be low. But where flows and performance diverge is often more interesting. 

  • The energy sector far outshone any other in terms of performance, but as for ETF flows, the sector saw outflows in 2022. How much further does the space have to run and are investors under- or over-allocated?
  • Value outperformed growth handedly as the technology sector took a beating at the hands of higher interest rates. Although value factor ETFs saw inflows for the year, momentum slowed towards year-end, just as growth inflows started picking up. Which style-factor are investors exposed to headed into 2023?
  • Investors reached for safety in U.S. Treasury ETFs despite abysmal performance. As recession fears loom, investors have looked to add duration in this exposure. How much further do ETF flows have to go?
  • See our 2023 Year Ahead Investor Guide for our views on energy, value, and the role of fixed income in a portfolio.

Figure 2. Flows vs. Performance

Bar chart ETF flows versus performance

Source: BlackRock, Bloomberg, Markit, chart by iShares Investment Strategy. ETF groupings determined by BlackRock, Markit. As of January 03, 2023. Reference period from January 01, 2022, to December 31, 2022. Index performance is measured by the following indexes: EM  Equity: MSCI Emerging Markets IMI Index; Gold: ICE LBMA Gold Price Index; U.S. Treasury: ICE BofA 10-Year U.S. Treasury Index; Communication Services: S&P 500 GICS Level 1 Communication Services Sector Index; Utilities: S&P 500 GICS Level 1 Utilities Sector Index; HY Credit: iBoxx USD High Yield Index; Commodities: S&P GSCI Index; Information Technology: S&P 500 GICS Level 1 Information Technology Sector Index; Consumer Staples: S&P 500 GICS Level 1 Consumer Staples Sector Index; Health Care: S&P 500 GICS Level 1 Health Care Sector Index; Financials: S&P 500 GICS Level 1 Financials Sector Index; Industrials: S&P 500 GICS Level 1 Industrials Sectors Index; Energy: S&P 500 GICS Level 1 Energy Sectors Index. Index performance is for illustrative purposes only.  Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Chart description: Bar chart displaying ETF flows and index performance in 2022 across sectors. The chart depicts a disconnect between flows and performance.

If the price action in markets wasn’t enough of a sign, sector ETF flows show exactly how investors navigated 2022’s record volatility. Overall, cyclical sector ETFs shed $30.9 billion in net assets throughout the year, while defensive sector ETFs added $24.5 billion. Health care and consumer staples led the bunch, adding over $13.2 and $7.3 billion, respectively. Notably absent were energy sector ETFs, which shed assets during Q2-Q3.

This year’s biggest sectoral loser in the ETF space was financials: a whopping $14.1 billion flew out of financial sector ETFs amid rising rates and a deeply inverted yield curve. Consumer discretionary names were in the same camp, dropping $8.3 billion in net assets. Surprisingly, information technology sector ETFs saw inflows on the year after $1.6 billion in Q4 inflows buttressed outflows from the previous quarter.

Although there can be numerous reasons why ETFs experience inflows or outflows on any given day, one investor tool we pay particular attention to are model portfolios as they exert an outsized influence on ETF flows. Model portfolios are a growing trend in investment advisory and are generally a mix of mutual fund and ETF holdings. Assets that follow a model are pooled together and traded as a block, meaning model rotations have resulted in some of the largest recorded flows in the ETF ecosystem. 

Look no further than mortgage-backed security (MBS) ETFs for an example. Spreads on MBS widened out in Q3, suggesting mortgage ETFs offered an attractive relative value opportunity for more tactically minded model portfolios. We saw just that, with $2.4 billion in inflows to mortgage ETFs in October as part of Q4 rebalances.

Figure 3. A Model Example

Bar chart MBS flow example

Source: BlackRock, Bloomberg, Markit, chart by iShares Investment Strategy. ETF groupings determined by BlackRock, Markit. ‘Mortgage spread relative to U.S. Treasuries’ represented by the 30-Year MBS Par Coupon relative to the weighted average of U.S. 5-Year and 10-Year Treasuries. As of January 03, 2023. A basis point (bps) is one hundredth of one percent (e.g. one basis point = 0.01%).

Chart description: Bar chart depicting mortgage ETF flows with mortgage spreads relative to U.S. Treasuries overlayed between 2018 and 2022. Mortgage spreads have moved higher since the beginning of 2022, while flows have stayed relatively negative until a large spike upwards in October 2022.

Surging inflation hovered at, or near, 40-year highs in 2022. Historic inflation ‘hedges’ badly underperformed on the year, and in turn, investors were left with few places to hide. Inflation-linked ETFs shed $10 billion in 2022 against a gloomy backdrop of rising rates, especially following the 5-year inflation breakeven rate’s peak in March. 

Gold, traditionally associated as a hedge against both geopolitical risk and inflation, did not shine in 2022. Despite increased market volatility as a price catalyst, gold ETFs shed $3.7 billion in 2022, negatively affected by a peaking USD, rising real rates, and COVID-dampened demand.

Commodities stepped into the spotlight in the first half of 2022 as investors balked at price surges on the heels of global supply chain disruptions and conflict in Europe. Flows followed suit: commodities notched $19 billion of inflows in Q1, led largely by broad market exposures.

As prices leveled into the second half of the year, investors seemingly exited stage left. The investor exodus peaked in July, the largest month of outflows since April 2013.4 Commodity ETFs remained in outflow mode in the second half of the year, touting a full reversal that saw $19 billion in outflows as the commodity complex faced easing demand dynamics and falling prices.

Akin to turning lemons into lemonade, broad losses in 2022 across asset classes offered sizeable opportunities for tax-loss harvesting. Many investors opted to sell underperforming strategies to reduce taxable gains, and municipal bonds emerged as a popular tax-loss harvesting favorite. 

Municipal bond ETFs notched a record year, fetching over $25 billion in net inflows. Flows were largely supported by tax trades, as evident by the price action timeline: 54% of net inflows were delivered in the last three months of the year, a time where investors tend to reposition portfolios for favorable tax treatments.

Stagnant growth, aggressive central banks, and a surging U.S. dollar painted an unfriendly emerging market (EM) backdrop for the year. Emerging market sovereign debt ETFs saw steady outflows, shedding $1.2 billion in the first three quarters, badly battered by a strong dollar and a safe-haven preference for U.S. Treasuries. However, Q4 delivered several favorable inflation reports, and with it, EM-optimism: $1 billion of inflows went to emerging market debt ETFs as the ominous macroeconomic backdrop eased.
Chinese equities followed a nearly opposite trajectory, fetching inflows in first half of the year but reversing course as the zero-COVID policy weighed on economic activity in Q3. But the easing of their policy restrictions following the 20th Party Congress spurred an about-face in flow momentum that saw Chinese equity ETFs post $1.1 billion inflows in Q4.

Kristy Akullian

Kristy Akullian, CFA

Nick Morales

Investment Strategist

Faye Witherall

Investment Strategist

Robert Young

Markets Coverage