Flow & Tell with iShares | May 2022

May ETF heat map

May ETF flows compared with index performance

After a dismal start to the year for U.S. equity indices and global markets alike, investors could be forgiven for their bleak outlook on growth and inflation. Central banks across developed markets are faced with a balancing act that pits tempering inflation against maintaining economic growth — with a backdrop of supply chain woes and geopolitical turmoil to complicate matters. As U.S. Federal Reserve Chair Jerome Powell candidly said in a recent interview, it will be “quite challenging to accomplish that [balancing act] right now” and will inevitably “include some pain.”¹

However, ETF flows show that investors have been positioning defensively, rather than pulling money out of the market altogether. Year-to-date, equity ETFs gathered nearly $170 billion, continuing the momentum seen throughout 2021.² Although fixed income ETFs have made up larger percentage of flows than equities over the last two months, wholesale outflows haven’t materialized.

Instead of capitulation, we see rotation. To start the year, investors moved from growth to value ETFs. This has shifted as cyclical sector ETFs saw outflows in favor of defensive sector ETF inflows. Recently, investors have added funds to minimum volatility strategies, while finding opportunities in fixed income. Despite market volatility, investors are finding ways to add defensiveness within their asset allocations while remaining invested.

Given the shaky market environment and gloomy forward expectations, investors are wondering where they can hide. We favor adding a defensive tilt to build portfolio resilience while remaining invested. Investors have looked to agree, with flows in May into key defensive categories. Dividend stocks are one example, as steady earnings and high levels of cash on hand are often required. Year-to-date, amidst tightening financial conditions, U.S. Dividend ETFs have seen over $6bn of inflows³. Over this period, dividend stocks have outperformed the broader U.S. stock market by over 20.38%⁴. To read more about how dividend stocks can be additive to a portfolio, see our iShare.com Insights Hub.

While dividend stocks can help increase the resilience of a portfolio, Minimum Volatility (Min Vol) strategies aim to offer a more full-fledged risk reduction. Given the uncertain path of both interest rates and growth, investors have been turning to Min Vol ETFs to position against deep drawdowns in major indexes. Minimum volatility stocks are those that have lower volatility characteristics relative to the broader U.S. equity market. With the S&P 500 down 12.76% since the beginning of the year⁵, Min Vol ETFs have gathered $153m of net inflows year-to-date and $623m of inflows in May⁶. Min Vol ETFs tend to have overweights to less cyclically sensitive sectors like software, pharmaceuticals, and biotechnology, making Min Vol not only a choice for added potential portfolio resiliency during market selloffs, but also an alternative way to add a defensive tilt.

Counterintuitively, flows to Municipal Bond ETFs in May were most likely due to poor performance in the asset class. Outside of the short-lived sell-off in bond markets due to initial Covid-19 closures, iShares National Muni Bond ETF (MUB) is now down to its lowest levels since 2014 after declining by 6.62% in price this year⁷. This performance had many institutional and retail investors alike looking to book losses against realized capital gains, which they could do by selling individual Muni bonds, Muni focused mutual funds or other Muni ETFs. The proceeds of those sales are often deployed into a similar exposures, of which ETFs have historically been a large recipient. In our facilitation of trades with clients, we saw MUB as a notable recipient of that tax-loss harvesting, as it’s known, adding $3.8bn in May, it’s largest month of inflows since inception⁸.