Flow & Tell with iShares | August 2022


Gargi Pal Chaudhuri Sep 20, 2022

ETF FLOWS IN AUGUST: A TALE OF TWO HALVES

While August is usually the quietest month of the year in ETF flows, U.S.-listed ETFs brought in more than $44B in net inflows in the month, above the historical trend.1 However, the ETF landscape saw a clear shift in risk appetite in the middle of August, as the bear market rally was met by sharp drawdowns in global assets leading to, and out of, the hawkish comments from Fed Chair Powell at the Jackson Hole meeting.

THEMES OF THE MONTH

A pivot away from the summer rally

Investors turn away from risk as the summer rally unwinds and global risk sentiment worsens.

Traveling back to the front end

Risk-reversal across markets helped the front end gather inflows. Jackson Hole was an important inflection point for the fixed income market.

Around the world

Emerging markets and developed markets ex-U.S. saw strong outflows this summer. Investors’ consideration of international exposures has been largely dependent on U.S. monetary policy.

AUGUST ETF FLOWS

AUGUST ETF FLOWS

August ETF heat map

August ETF flows compared with index performance

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of September 01, 2022. Flows normalized by AUM as of July 31, 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. Index performance is measured by the following indexes: Real Estate: S&P 500 Real Estate GICS Level 1 Index; Consumer Discretionary: S&P 500 Consumer Discretionary GICS Level 1 Index; Consumer Staples: S&P 500 Consumer Staples GICS Level 1 Index; Growth: Russell 3000 Growth Index; Industrials: S&P 500 Industrials GICS Level 1 Index; U.S. Treasury: ICE BofA 10-Year U.S. Treasury Index; HY Credit: iBoxx USD High Yield Index; IG Credit: iBoxx USD Investment Grade Index; Value: Russell 3000 Value Index; Financials: S&P 500 Financials GICS Level 1 Index; Commodities: S&P GSCI Index; Utilities: S&P 500 Utilities GICS Level 1 Index; Energy: S&P 500 Energy GICS Level 1 Index. Coloring is based on quadrants: quadrant I: green; quadrant II: yellow; quadrant III: pink; quadrant IV: purple.

Chart description: Scatter plot showing the relationship between index performance and ETF sub-asset class flows for August 2022. The chart shows some sub-asset classes, like U.S. Treasuries and energy, seeing positive index performance and ETF flows over the course of the month; other sub-asset classes, such as value and consumer staples, shows positive ETF flows but negative index performance; and finally, other sectors, such Information Technology have seen both negative index performance and outflows.


A PIVOT AWAY FROM THE SUMMER RALLY

A PIVOT AWAY FROM THE SUMMER RALLY

Since mid-June, investors had celebrated a broad-based recovery across both global equity and fixed income assets, as better-than-expected earnings results, early evidence of inflation peaking, and lower liquidity during the summer months led to an outsized rally, lifting U.S. equities more than half-way from the year-to-date bottoms in June. Historically, August has always been the quietest month of the year, with the smallest amount of ETF inflows on average, especially in equity ETFs2.

However, the dislocation between fundamentals and market performance eventually dissolved into reality in mid-August, with a notable pivot in global risk sentiment. U.S. investors added back into value focused equity exposures after a clear preference for growth in July. In the last week of August, growth focused U.S. listed ETFs saw more than $4bn in net outflows, in contrast to $5bn of inflows in July, and another $7bn in the first three weeks of August3.

In sectors, investors still favor a defensive tilt, through exposure to quality sectors and factors, like healthcare and minimum volatility. The only exception was in U.S. financials, driven by recent curve steepening and better than expected Q2 earnings results, taking the largest share of sector flows in August with more than $4bn of net inflows added4.

Outflows post-Jackson Hole across growth & value ETFs

Area chart showing outflows from growth and value ETFs after Jerome Powell’s speech in Jackson Hole.

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. ETF categories determined by Markit. As of September 01, 2022.

Chart description: Area chart showing outflows from growth and value ETFs after Jerome Powell’s speech in Jackson Hole. A line that shows the S&P 500’s level shows similar declines.


TRAVELLING BACK TO THE FRONT END

TRAVELLING BACK TO THE FRONT END

Over $3bn in assets left front-end Treasury ETFs during the month of July as risk-on sentiment rippled through both equity and fixed income markets5. Flows moved back into the belly and long-end of the curve in attempt to add duration in portfolios and inch closer to benchmark weights. This trend persisted for the majority of August before turning course in the leadup to the Jackson Hole Symposium. The hawkish-rhetoric from Powell pushed 2-year yields to above 3.5%, the highest level seen since the global financial crisis, and brought flows back to the front end of the curve6. Short-duration funds clawed back nearly $4bn in assets in the final three days of the month7.

Credit funds also fell victim to the risk-reversal across markets during the summer months. Credit funds added over $12bn in assets across investment grade and high yield funds in July and were en route to gathering another $5bn in August8. In the leadup to Jackson Hole, credit funds gave back nearly $4bn in assets, slowing net inflows into investment grade funds and pushing high yield funds to net outflows during the month of August9.

FOMC rhetoric drives front-end Treasury flows

Line and bar chart showing 2-year Treasury yield and flows into the short-dated Treasury ETFs.

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. ETF categories determined by BlackRock. 2-Year Treasury Yield represented by US Generic Govt 2 Yr Index (USGG2YR Index). As of September 01, 2022.

Chart Description: Line and bar chart showing 2-year Treasury yield and flows into the short-dated Treasury ETFs. After the Jackson Hole Symposium, yields rose while flows into the short-fated Treasury ETFs spiked.


AROUND THE WORLD

AROUND THE WORLD

Persisting inflation, restrictive monetary policy, and increased recession risks are not only regional fears in the United States, but globally as well. Since the beginning of the year, the Federal Reserve has increased rates by 2.25%, contributing to a stronger U.S. dollar against other foreign currencies. In his speech at Jackson Hole, Federal Reserve Chair Powell iterated the central bank’s commitment to restoring price stability which will require “a restrictive policy stance for some time.” What does this mean for international markets? Investors may be likely to stick to the dollar for quite some time, applying pressure on international currencies and economies. On top of currency weakness, developing economies have been hit hard by inflation led by food and energy prices. Europe focused U.S. listed ETFs continued to see outflows this summer, losing more than $4bn since the beginning of July10.

While emerging market funds added $1.6bn in July and at the beginning of August, flows reversed and shed -$941m after Jerome Powell’s hawkish speech on August 26th11. In China, new Covid shutdowns and increased geopolitical risks weighed on investor sentiment. U.S.-listed China ETFs saw consistent outflows in July and August, losing $1.69bn in that period12

Investors weigh policy risk in China

Line chart showing MSCI China Index Performance and Cumulative Flows into China ETFs.

Sources: BlackRock, Bloomberg, chart by iShares Investment Strategy. ETF categories determined by Markit. As of September 01, 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.

Chart description: Line chart showing MSCI China Index Performance and Cumulative Flows into China ETFs. Performance has steadily decreased year-to-date, however, flows have seen net-positive inflows. In July, China ETFs starting to see outflows.


FEATURED FUNDS

FEATURED FUNDS

FEATURED FUNDS

Gargi Pal Chaudhuri

Gargi Pal Chaudhuri

Head of iShares Investment Strategy Americas at BlackRock

Jasmine Fan, CFA

Investment Strategist

Contributor

Jon Angel

Investment Strategist

Contributor

Mike Malof

Markets Coverage

Contributor