Oct 8, 2021
September ETF flows were muted amid renewed market volatility. But under the hood, investors positioned for inflation in both the energy and real estate sectors, and the global economic reopening spread to countries including Japan.
Fuel shortages add fire to the inflation outlook.
A historic rebound in oil continued as supply-chain kinks lifted prices and boosted demand for protection against fast-rising inflation.
There’s no place like home.
A sharp rise in housing prices drove inflows into real estate sector ETFs.
Japan creeps toward reopening.
Japanese stocks rallied in September though, while ETF flows picked up, did not demonstrate broad conviction that the rally will continue apace.
BlackRock, Bloomberg, chart by iShares Investment Strategy. As of October 01, 2021. Flows normalized by AUM as of September 01, 2021. Indexes used for each asset class: High Yield Credit: iBoxx USD Liquid High Yield Index; Investment Grade Credit: iBoxx USD Liquid Investment Grade Index; U.S. Treasury: ICE BofA Current 10-Year US Treasury Index; Emerging Markets: MSCI EM Emerging Markets IMI USD Net; Developed Markets ex-U.S.: MSCI WORLD ex USA IMI USD NETR; Gold: iShares COMEX Gold Trust Net Asset Value Index; U.S. Equity: S&P 500 Index; Commodities: S&P GSCI Index Spot. 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.
Energy sector stocks have led the market for most of 2021 and strong performance spilled into September. Energy climbed over 9% and was the only S&P 500 sector to advance.1 Oil and natural gas prices surged to multi-year highs in the face of supply chain disruptions in Europe and Asia, causing investors to position for higher inflation.
ETF flows have followed energy’s sharp rise in 2021, culminating in nearly $14 billion in inflows year-to-date, including $1.6 billion in September.2 However, longer-term structural headwinds remain in place for the sector as the world moves toward a low-carbon economy, a force that may dampen flow momentum that often coincides with strong performance. As energy volatility continues to play out in the short-term, investors have turned to Treasury Inflation-Protected Securities (TIPS). Inflows to inflation-linked ETFs total nearly $30 billion year-to-date, with short-term TIPS ETFs accounting for over one-third of those inflows.3
September ETF Sector Flows
Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of October 01, 2021. Flows normalized by AUM as of September 01, 2021.
The desire for more space at home to live, work and shop, combined with ultra-low mortgage rates, has triggered a historic rise in real estate prices, with demand outstripping available housing stock. The housing market hasn’t been this hot since 2007. We’ve seen the trend show up in real estate sector ETFs, which brought in $3 billion in inflows in September, more than any other sector.
Inflation & Real Estate Sector ETF Flows
Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of October 01, 2021.
Japanese stocks jumped nearly 4% in September as Yoshido Suga stepped down as Prime Minister, clearing the way for Fumio Kishida to take the reins of the Liberal Democratic Party (LDP) and the government’s controlling position. The new PM is calling for a general election at the end of October to solidify his mandate, which includes a new fiscal stimulus package and maintaining highly accommodative monetary policy.
Flows accelerated into Japan-related ETFs in September, with nearly half of year-to-date inflows coming in the last two weeks of the month. Still, the inflows were not heavy enough to suggest strong conviction in the rally, at least for now.
Beyond the political changes, investors may be positioning for an economic reopening. Vaccinations in Japan have overtaken the U.S., and new COVID cases are falling. A nationwide state of emergency was lifted late last month, signaling the potential for a continued economic reopening, and creating optimism that pent-up consumer spending will accelerate into year-end.
Japan Index Performance & ETF Flows
Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of October 01, 2021. Index represented by MSCI Japan Index (MXJP 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.
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1 Source: BlackRock, Bloomberg. As of October 01, 2021. Index represented by Dow Jones U.S. Oil & Gas Total Return Index (DJUSENT 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.
2 Source: BlackRock, Bloomberg. As of October 01, 2021.
3 Source: BlackRock, Bloomberg. As of October 01, 2021.
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