1 Source: BlackRock, Bloomberg. Reference indexes include the S&P 500 Index and the Bloomberg Aggregate Bond Index. Reference periods include the first half of 2021 (January 01, 2021 – June 30, 2022) and the first half of 2022 (January 01, 2022 – June 30, 2022). 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.
Flow & Tell with iShares | Midyear Flows Check-in
Jul 11, 2022 Global
2022 is a historical year for markets: this time last year, the S&P 500 Index was up 14.4% and the U.S. Aggregate Bond Index was off 1.6%; in the first half of 2022, the S&P 500 is down 20.6%, while the U.S. Aggregate Bond Index is down 10.3%.1 Not only has the magnitude of this year’s sell-off been pronounced but so has the makeup, with both equities and bonds falling in tandem. As we make sense of this market, we can look to ETF flows to see how and where the biggest trends have played out. From sector and recession positioning to high yield credit and crypto-related flows, we examine what ETF flows are telling us as we move into the back half of the year.
10 ETF FLOW THEMES THAT DEFINED THE FIRST HALF OF 2022
U.S.-listed equity ETFs have recorded over $200 billion in net inflows so far this year despite equity markets having entered bear market territory.2 Some of those inflows reflect demand for the ETF structure rather than new demand for stocks: fund managers have shifted billions from mutual fund structures into more tax-advantaged ETF ones this year. But even evaluating the total fund universe (mutual funds + ETFs) equity funds more broadly have added over $80 billion in new assets.3 So while market price action has largely been one of a correction, flows show market participants remain invested. We’ll be watching broad equity flows closely into the back half of the year to gauge if recessionary fears are pushing investors out of their exposures or if the bear market turns out to be a technical correction.
ETF & mutual fund flows
Source: BlackRock, Markit, EPFR, chart by iShares Investment Strategy. Groupings determined by BlackRock, Markit, EPFR. As of June 30, 2022.
Chart description: Bar graph showing U.S. equity ETF flows on a yearly basis, as well as the combined flows into both equity ETFs and mutual funds. Graph calls attention to the fact both categories are positive in 2021 and 2022 after six consecutive years in which the both ETF and mutual fund category of flows was negative, meaning real equity flows for those years was negative.
2 Source: BlackRock, Markit, Bloomberg. Groupings determined by BlackRock, Markit. As of June 30, 2022.
3 Source: BlackRock, EPFR. Groupings determined by BlackRock, EPFR. As of June 30, 2022.
Investor positioning has largely played out on a sector basis within equities, showing a clear tilt towards defensive allocations. Health care and utility sector ETFs have gathered the most assets in the first half of the year, posting inflows of $9.2 billion and $4.5 billion, respectively.4 On the other hand, financial and consumer discretionary funds have seen the most outflows in 2022 given their cyclical nature and mounting fears of an economic slowdown. Somewhat surprisingly, energy sector ETFs have seen outflows this year despite strong performance, meaning investors may still be under-allocated on a relative basis.
Sector over/underweights
Source: BlackRock, Markit, Bloomberg, chart by iShares Investment Strategy. Groupings determined by BlackRock, Markit. ‘ETF Flow Z-Score’ is the standard deviation of one-year cumulative flows ending in June 2022 relative to its historical mean.
Chart description: Bar graph showing the z-score of the one-year cumulative flows across equity sector ETFs to show sector over vs. underweights. Health care, consumer staples, and utility sectors stand out as obvious overweights — all above two standard deviations from their typical flow levels. Industrials, financials and consumer discretionary flows are the largest underweights, over one standard deviation from their mean.
4 Source: BlackRock, Markit, Bloomberg. Groupings determined by BlackRock, Markit. As of June 30, 2022.
Growth equities have borne the brunt of this year’s selloff as rates reprice higher, thereby discounting their far-off future cash flows. On the other hand, dividend paying stock prices tend to reflect near-term profits, a good proxy for quality companies with strong balance sheets and steady current cash flows. As a result, dividend ETFs have added over $41.5 billion in net assets year-to-date, nearly matching record inflows into the space in 2021 in just half the time.5
5 Source: BlackRock, Markit, Bloomberg. Groupings determined by BlackRock, Markit. ‘Year-to-date’ representative of the period January 01, 2022, through June 30, 2022. 2021 dividend ETF net flows totaled $41.9 billion — the largest year of inflows recorded into the space. As of June 30, 2022.
On a factor basis, flows have largely favored value over growth in 2022 as financial conditions continue to tighten. Value ETFs have added over $57 billion in net assets year-to-date compared to just $7 billion into growth ETFs — the largest notional differential on record.6 Value has historically tended to outperform in a rising rate environment as growth is hurt by higher discount rates for future cash flows.
6 Source: BlackRock, Markit, Bloomberg. Groupings determined by BlackRock, Markit. As of June 30, 2022.
Broad market commodity ETFs saw a record year of inflows in 2021, adding $8.4 billion as commodity prices soared amid supply chain disruptions and geopolitical volatility.7 2022 has seen much of the same, with the space adding over $6.0 billion in the first six months of the year.8 However, broad market commodity ETFs posted outflows in both May and June of 2022 as commodity prices have moved away from their highs, and as investors begin to worry about slowing economic growth. Although we expect commodity prices to remain elevated, particularly in agriculture and industrial metals, the slower rate of price appreciation across the commodity complex could continue to show up as outflows from the space.
7 Source: BlackRock, Markit, Bloomberg. Groupings determined by BlackRock, Markit. As of June 30, 2022.
8 Source: BlackRock, Markit, Bloomberg. Groupings determined by BlackRock, Markit. As of June 30, 2022.
Although gold is traditionally thought of as an inflation hedge, ETF flows show that investors are turning to gold ETFs in times of geopolitical instability, rather than when inflation expectations are moving higher. The BlackRock Geopolitical Indicator (BGRI) surged in 2022, pushed notably higher by the Russia/Ukraine conflict. Gold ETFs saw inflows that rivaled those at the height of the COVID pandemic. Since April, flows to gold ETFs have declined, even as inflation has reached new peaks. We chalk this up to gold’s correlation with real yields: as interest rates move higher, the relative attractiveness of a non-yielding asset like gold decreases.
Gold and geopolitical volatility
Source: BlackRock, Markit, Bloomberg, Refinitiv, chart by iShares Investment Strategy. Groupings determined by BlackRock, Markit. The BlackRock Geopolitical Risk Indicator (BGRI) tracks the relative frequency of brokerage reports and financial news stories associated with specific geopolitical risks. We adjust for whether the sentiment in the text of articles is positive or negative, and then assign a score. The score reflects the level of market attention to each risk versus a 5-year history. We use a shorter historical window for our COVID risk due to its limited age. As of June 30, 2022.
Chart description: Combined graph showing gold ETF flows as bars and the BlackRock Geopolitical Risk Indicator as a line. The two metrics correlate very well together, with gold ETF inflows peaking alongside the BGRI in both early 2020 and 2022, while gold ETF outflows in 2021 marked a notable decline in the BGRI.
Often touted as an inflation hedge and source of stability during periods of market stress, cryptocurrencies such as bitcoin have recently become highly correlated with stocks, particularly those in the tech sector.9 In fact, the price of bitcoin has closely followed the sell-off in tech more broadly, but often with more extreme moves in either direction. Rather than serving as a refuge in the storm, cryptocurrencies have become something of a canary in the coal mine. We’ve seen this dynamic play out in ETF flows as well: both crypto-related ETFs, and communication services and information technology ETFs posted outflows during the second quarter of 2022.
9 Source: BlackRock, Bloomberg. Reference indices include the Nasdaq 100 Index and the Bloomberg bitcoin spot exchange rate (XBTUSD Currency). 90-day correlation between the Nasdaq 100 and bitcoin at 62%. Correlation is used as it can identify the degree of similarity in the performance and risk profile between two indices. Correlation measures the degree to which two or more things move in relation to one another over a specified period of time. As of June 30, 2022.
After four straight months of inflows, bank loan ETFs recorded two consecutive months of outflows in May and June, totaling nearly $3.0 billion. Bank loans have tended to perform well during rising rate environments. However, their lower credit quality means they’re susceptible to risk-off sentiment. Fixed income markets have been gripped by such a sell-off as recession fears build on the horizon, adversely impacting bank loan ETFs.
Another testament to the risk-off sentiment in the bond market could be found in the high yield credit market, which struggled alongside risk assets in Q2 ’22. ETF flows quantified this trend, with high yield ETFs shedding $3 billion in assets in June, adding to nearly $14 billion in outflows year-to-date. Despite broad-based outflows, trading volumes in high yield credit ETFs were elevated — showcasing how investors turn to the ETF structure during times of volatility to help hedge and manage risk effectively.
Record high yield ETF outflows
Source: BlackRock, Markit, Bloomberg, chart by iShares Investment Strategy. Groupings determined by BlackRock, Markit. As of June 30, 2022.
Chart description: Bar graph showing high yield ETF flows from 2010 through 2022. 2022 stands out as the year with the largest outflows, of nearly $15 billion, despite having only six months gone by in the year.
10 BlackRock, Markit, Bloomberg. Groupings determined by BlackRock, Markit. As of June 30, 2022.
U.S. Treasury ETFs continue to attract inflows despite yields broadly moving higher. That likely reflects a flight to safety. Investors have turned to the front-end of the curve as they shorten duration amid a rising rate environment: short-term U.S. Treasury ETFs have added over $30 billion year-to-date, as opposed to just $22 billion across all other maturities.11
11 Source: BlackRock, Markit, Bloomberg. Groupings determined by BlackRock, Markit. As of June 30, 2022.
