Flow & Tell with iShares | Feb 2022


Gargi Pal Chaudhuri Mar 9, 2022

ETF FLOWS IN FEBRUARY: SEEKING STABILITY

February played out in two parts: an increasingly hawkish Fed pushed equity performance lower, but still-strong demand for stocks played out in flows. Bond funds were increasingly out of favor as forecasts for interest rate hikes rose. But Russia’s invasion of Ukraine marked an inflection point that saw a sharp reversal in favor of flights to safety, thematic and targeted exposures that were most impacted by the conflict and a shallower expected path of interest rates.

THEMES OF THE MONTH

Sanctions and impacted sectors.

Events in Ukraine translated to a surge in trading in related ETFs: Russia dedicated, aerospace & defense, and cybersecurity funds all saw upticks in trading volume.

Stability in dividends.

Flows to dividend focused ETFs have accelerated as investors seek stability.

Treasury flows respond to rates.

Flows to long-dated bond funds reverse course by turning positive as geopolitical instability sparks a flight to safety.

FEBRUARY ETF FLOWS

February ETF heat map

February ETF flows compared with index performance

Chart showing February ETF flows heat map

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of March 01, 2022. Flows normalized by AUM as of January 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 indices: EM Debt: DB Emerging Markets Debt USD Index; Communication Services: S&P 500 Communication Services Sector GICS Level 1 Index; Growth: Russell 2000 Growth Index; U.S. Equity: S&P 500 Index; EM Equity: MSCI Emerging Markets USD Index; DM ex-U.S.: MSCI World ex-U.S. USD Index; Value: Russell 3000 Value Index; U.S. Treasury: ICE BofA 10-Year U.S. Treasury Index; TIPS: Bloomberg U.S. Treasury Inflation Notes Index; Gold: ICE LBMA Gold Price Index; Commodities: S&P GSCI Index Spot Index; Oil & Gas: S&P GSCI Crude Oil Total Return CME Index. Coloring is based on quadrants: quadrant I: green; quadrant II: yellow; quadrant III: pink; quadrant IV: purple.


SANCTION SPILLOVER

Russia’s invasion of Ukraine prompted a global flight to safety: the U.S. dollar strengthened broadly, and U.S. 10-Year Treasury yield fell below 1.83% after trading above 2.0% just two weeks prior.1 Western governments levied sanctions against Russia to block the country’s access to global capital markets, adding to the instability of the moment as investors digested their impact. We emphasize the importance of looking past the volatility and staying invested for the long-term. Thematic exposures saw a surge in interest. iShares U.S. Aerospace & Defense ETF (ITA) ranked in the top five product pages visited on iShares.com in the last week of February after the Russian invasion.2 That fact-finding translated to fund flows: ITA logged its largest month of inflows since 2017, adding $309 million in net assets.3 Concern over Russia’s retaliatory actions in response to global sanctions prompted the iShares Cybersecurity & Tech ETF (IHAK) to trade over double its 2021 average daily volume.4 The fund now has over $560 million in total assets.5

Volumes surge in impacted thematic ETFs

Chart showing volumes surge in impacted thematic ETFs

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. ‘Share Volume’ defined as the total number of shares traded on the consolidated U.S. equity tape on the respective dayETFs referenced include the iShares Cybersecurity & Tech ETF (IHAK US Equity) and iShares U.S. Aerospace & Defense ETF (ITA). Index referenced is the CBOE Volatility Index (VIX 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.


QUALITY INCOME

One trend you may have missed in an otherwise record-breaking year was a steady inflow to dividend-focused ETFs. These funds have taken in assets each month since August 20206, and now flows are accelerating. February marked the largest month of inflows ever to dividend ETFs, adding $8.6 billion in net assets and bringing 2022 net inflows to over $14.4 billion in just two months’ time.7 The iShares Core High Dividend ETF (HDV) posted its largest month of inflows since inception in February, accumulating $559 million over the course of the month.8

Although consensus expectations are for another year of positive performance in equities, the potential for more volatility often tempers risk appetite. We prefer adding quality factor exposure as a ballast to portfolios as a result. One potential measure of quality is dividend growth: targeting companies with high dividends can help to avoid unprofitable and highly levered names that may suffer in a rising rate environment and moderating economic growth. What’s more, the relative price to earnings (P/E) ratio between the S&P 500 and the S&P 500 High Dividend Index has diverged significantly over the past two years, perhaps presenting an attractive entry point for income focused investors.

Dividend momentum

Chart showing dividend flow momentum (2016 to 2022)

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. ETF groupings determined by BlackRock, Markit, including ‘Dividend ETFs’. ‘Price/Equity’ ratio is the price of the stock divided by the company’s earnings per share, aggregated to the index level. Indices referenced include the S&P 500 Index (SPX Index) and the S&P 500 High Dividend Index (SPXHDUP Index).


AHEAD OF THE CURVE

After a weak start to the year as the Fed’s narrative became increasingly hawkish, demand for long-dated fixed income funds reversed course in February on the back of heightened geopolitical risks. In January, long-term bond ETFs shed $1.5 billion as investors shied away from exposures that would be highly affected by increasing interest rates.9 But as the Russia-Ukraine conflict became reality after weeks of stalemate and diplomatic talks, investors returned to them in a flight to safety.

The uncertainty caused by the conflict, and potential spillover risks as it continues to play out, has many investors forecasting fewer Federal Reserve policy rate hikes in 2022 than was expected just a few weeks prior to the invasion. Forecasts reached a peak of seven implied rate hikes on February 14th before dropping to just five by the end of February.10 As a result, long-dated bond funds gathered $1.4 billion of inflows in February, almost completely recouping their losses from January.11

Short-dated funds, on the other hand, continued to see strong inflows throughout. Ahead of the Federal Reserve’s monetary policy changes, investors flocked to short duration, ETF strategies that are less susceptible to risks from interest rate hikes, resulting in $1.5 billion in inflows for short-term products in January.12 This trend continued in February with $4.2 billion of inflows, more than doubling January’s take.13

Flight to safety in fixed income

Chart showing how duration flows can mirror investor needs

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. ETF groupings determined by BlackRock, Bloomberg. Data as of February 01, 2022.


Gargi Pal Chaudhuri

Gargi Pal Chaudhuri

Head of iShares Investment Strategy Americas at BlackRock

Kristy Akullian

Investment Strategist

Contributor

Nick Morales

Investment Strategist

Contributor