Flow & Tell with iShares | Oct 2021

Gargi Pal Chaudhuri Nov 5, 2021


October ETF flows were the fourth-largest monthly haul on record at $79.1 billion, adding to the already record-breaking flows seen so far in 2021 totaling $720 billion.1 Many of the standout flows over the month were the result of institutional rebalances, as professional investors position ETF portfolios for the rest of the year. Also in the spotlight were corporate earnings, which have revealed important insights into the state of the economic recovery, and the ongoing saga around supply chain disruptions.


Model ETF portfolio rebalances focus on fallen angels.

Reflationary themes and the search for yield were top of mind as model ETF portfolio rebalances led to outsized flows during October for some ETFs.

Seeking granularity during earnings season.

Earnings season led to a sharp refocus on sector ETFs as investors turned their focus away from broader macro trends.

Positioning for supply chain disruptions.

With supply chain delays dominating headlines, investors favored sectors that tilt toward higher profit margins.


October ETF heat map

October ETF flows compared with index performance

Chart: October ETF heat map

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. Universe includes all U.S.-domiciled ETFs. MTD ETF flows normalized defined as net inflows between October 01, 2021-November 01, 2021 divided by AUM as of October 01, 2021. 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: High Yield Credit: iBoxx USD Liquid High Yield Index; Investment Grade Credit: iBoxx USD Liquid Investment Grade Index; Inflation: Bloomberg U.S. Treasury Inflation Notes TR Index; Consumer Staples: MSCI USA Consumer Staples Index; Financials: Dow Jones U.S. Financials Index; Real Estate: FTSE Nareit Equity REITs Total Return Index; Information Technology: MSCI USA Information Technology Index; Energy: Dow Jones U.S. Oil & Gas Total Return Index; Growth: Russell 1000 Growth Total Return Index; Value: Russell 1000 Value Total Return Index; Consumer Discretionary: MSCI USA Consumer Discretionary Index; U.S. Equity: S&P 500 Index; DM ex-U.S.: MSCI World ex-USA IMI USD Index; EM Equity: MSCI Emerging Markets IMI USD Index.


Professional investors increasingly build whole portfolios using ETFs, and when some of the largest managers reshuffle their holdings, it can register in ETF flows. BlackRock model ETF portfolios with more than $158 billion in global assets under management were among those who rebalanced in October, resulting in some standout flows to several ETFs.2 Reflationary themes were in focus, but with an eye to moderately reducing some risk in stocks and searching for yield within fixed income.

The iShares Fallen Angels ETF (FALN) had its largest month of net inflows since inception, adding $1.2 billion in net assets during October.3 The outsized October flows add to an already remarkable trajectory: growing from a $400 million fund at the end of 2020 to more than $4 billion fund at the end of October.4 “Fallen angels” are bonds that were issued with an investment grade rating but were subsequently downgraded to “speculative,” or high yield-rated grade. Higher economic growth rates could benefit these recently downgraded issuers — many of which fell victim to last year’s pandemic-related slowdown. Indeed, we think improving business conditions could cause some fallen angels to be upgraded to investment grade status.

Certain BlackRock model ETF portfolios seeking to mitigate equity and inflation risks through quality exposures also added to the iShares TIPS ETF (TIP) and iShares MSCI USA Min Vol Factor ETF (USMV), and pulled back from tech-heavy sector allocations and investment grade corporate bonds that might struggle in a rising interest rate environment.

Covid-era fallen angel upgrade cycle on similar path of previous fallen angel upgrade cycles

Chart: Covid-era fallen angel upgrade cycle on similar path of previous fallen angel upgrade cycles

Source: BlackRock, ICE. As of November 01, 2021. Reference universe is ICE BofA U.S. Fallen Angel High Yield Index. Reference historical periods are calculated as constituent count downgraded to high yield status during a start date range and then subsequent months before constituents returned to investment grade status. Period start date ranges as follows: ‘Early 2000s’: March 01, 2002-June 30, 2003; ‘Global Financial Crisis’: February 02, 2009-May 31, 2009; ‘Oil Crash’: January 31, 2016-March 31 2016; ‘COVID-19 Pandemic’: January 01, 2020-June 20, 2020.


Investors zeroed in on earnings season during the second half of October, shifting gears from the broader macro trends that dominated headlines during the summer months. As a result, U.S.-domiciled sector ETFs saw a sizable pickup in activity and accounted for nearly 40% of October flows versus an average of just 16% year-to-date.5

More than 70% of the S&P 500 companies reported third-quarter earnings in October and many companies topped analyst forecasts, a positive trend that renewed optimism around the U.S. equity market.6 In both flows and performance, the recent focus has been on finding the sectors that are best positioned to weather cross-currents such as inflation and broken supply chains. Financials exemplify the trend, with October ETF inflows totaling $2.4 billion.7 A strong earnings cycle benefitted the sector, as did a relative insensitivity to supply chain woes and rising interest rates.

We advocate for a barbell approach combining value and quality: a strong U.S. consumer continues to drive the economic recovery — benefiting cyclical, value-oriented companies — while hedging with quality exposures may help guard against pass-through inflation and volatility as the economic rebound continues to power new record highs.

Sector ETFs driving flow activity

Chart: Sector ETFs driving flow activity

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of November 01, 2021.


Supply chain bottlenecks are hitting equity market sectors in different ways, from surging energy costs and widespread semiconductor shortages to a persistent shortage of workers to perform key jobs, such as drive trucks. As the reverberations from the pandemic continue, sectors with the highest operating margins (operating income/total revenues) are also seeing the largest flows. We attribute this connection to the ability of high-margin sectors to weather delays and cost pressures better than low-margin sectors.

Information technology has been in the spotlight as relatively low operational costs and an increasingly virtual world insulate it from the volatility of the physical world. However, it’s not just about technology, as real estate sector ETFs accumulating $3.6 billion in inflows over the past two months.8 Increased housing demand, labor shortages, and costly raw materials has hit both sides of the supply and demand equation, providing a tailwind for the sector headed into year-end. For more information about how to help protect your portfolio from supply chain disruptions, please see our latest commentary on global supply chain issues.

Operating margins and ETF flows

Chart: Operating margins and ETF flows

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of November 01, 2021.

Gargi Pal Chaudhuri

Gargi Pal Chaudhuri

Head of iShares Investment Strategy Americas at BlackRock

Kristy Akullian

Investment Strategist


Nick Morales

Investment Strategist