Flow & Tell with iShares | August 2022

August ETF heat map

August ETF flows compared with index performance

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.

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.

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.