Flow & Tell with iShares | September 2022

ETF FLOWS IN SEPTEMBER: A SEPTEMBER TO REMEMBER

September is a historically challenging month for risk assets and this year’s was no exception. Benchmark indexes for nearly all asset classes were down on the month. The S&P 500 posted its worst monthly return since March 2020 and one of its five worst months of the millennium.1 The U.S. Aggregate Bond Index ended the month down 4.3% — its worst September on record and its third worst month overall — continuing this year’s unusual trend of stocks and bonds declining together.2

 

What wasn’t down were trading volumes, as a blitz of macro drivers made ETFs the trading tools of choice for many investors. 2022’s ETF trading volumes have already overtaken 2021’s record levels — even before reaching the fourth quarter3. We expect the choppiness to continue and prefer more nimble investment vehicles to reflect the rapidly changing economics.

THEMES OF THE MONTH

Investors flee from volatility

Macroeconomic drivers scared investors towards minimum volatility.

Doom and gloom dominates

Defensive positioning and higher yields have made fixed income more attractive.

Emerging markets out of favor

Idiosyncratic geopolitical risks drive volumes while investors opt for domestic exposures.

SEPTEMBER ETF FLOWS

September ETF heat map

September ETF flows compared with index performance

Scatter plot showing the relationship between index performance and ETF sub-asset class flows for September 2022.

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of October 3, 2022. Flows normalized by AUM as of September 30, 2022.

 

Index performance is measured by the following indexes: Real Estate: S&P 500 Real Estate Index, Communication Services: S&P 500 Communication Services Index, Utilities: S&P 500 Utilities Index, U.S. Equity: S&P 500 Index, Large Cap: Russell 1000 Index, Energy: S&P 500 Energy Sector Index, DM ex-U.S.: MSCI World ex USA Index, Commodities: S&P GSCI Index, TIPS: Bloomberg US Treasury Inflation Index, IG Credit: iBoxx Investment Grade Index, Health Care: S&P 500 Health Care Sector Index, U.S. Treasury: ICE BofA Current 10-Year US Treasury Index, HY Credit: iBoxx USD Liquid High Yield Index, Gold: ICE LBMA Gold Price Index. Coloring is based on quadrants: quadrant I: green; quadrant II: yellow; quadrant III: pink; quadrant IV: purple.

 

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.

Chart description: Scatter plot showing the relationship between index performance and ETF sub-asset class flows for September 2022. Chart shows some sub-asset classes, such as utilities and U.S. Treasury having positive ETF flows but negative index performance. Other sectors, such as energy and gold, have seen both negative index performance and outflows in September.


SPOOKY SEASON FOR STOCKS

September brought with it the looming threat of a domestic recession. In the month, we saw proof of stubbornly sticky inflation and a third consecutive “jumbo” 0.75% rate hike, reaffirming the Federal Reserve’s commitment to curb prices. The Fed’s latest economic projections include a climbing interest rate with no expected cuts until 2024, accompanied by higher unemployment rate projections jumping to 4.4% by year-end.4 U.S. investors responded by shedding risk and seeking solace in historically defensive allocations.

That marked a sharp reversal from the mood of the summer. August saw significant inflows into growth-focused ETFs, netting $7 billion in the first three weeks of the month, as the bear market rally lifted risk appetite.5 But fall brought higher interest rates and a worsening growth outlook, and market sentiment shifted with the seasons. Investors continued to add to value ETFs, as they have for most of the year, netting $4 billion of inflows in September.6 Soon enough, low volatility emerged as a favored factor, fetching $2 billion of inflows in September.7

Reduced risk appetite and growing recession fears also spurred inflows towards defensive sectors, with utilities and consumer staples ETFs both posting positive inflows of $446 million and $376 million in September, respectively.8 This was an exclusive feat: only 3 of 11 sectors realized inflows in September.  As investors brace for spooky season, we continue to prefer high quality and low volatility strategies for potential downside protection.

Minimum volatility, maximum flows

Area chart showing cumulative flows into minimum volatility ETFs since January 2022.

Source: BlackRock, Markit, Bloomberg, chart by iShares Investment Strategy. ETF groupings determined by BlackRock, Markit. As of September 29, 2022.

Chart description: Area chart showing cumulative flows into minimum volatility ETFs since January 2022. Area chart shows steady inflows into minimum volatility ETFs beginning in May 2022, cumulatively adding around $7 billion of inflows by the end of September.


FIXIN’ TO ADD TO FIXED INCOME

The doom and gloom that dominated headlines in the month translated to record U.S. Treasury ETF inflows, totaling more than $20 billion in September.9 Inflows were heavily concentrated in the front-end of the curve: short-term U.S. treasury ETFs made up 89% of the flows into the space.10 That’s in line with our views, where a sharply inverted yield curve leaves us to prefer high quality, but shorter-term fixed income exposures for higher yields with less interest rate risk.

Fixed income ETFs were in focus more broadly as well. Year-to-date, trading volumes in fixed income ETFs jumped by nearly half compared to the same time last year.11 Turnover tends to move with volatility, and September brought plenty. An aggressive Federal Reserve, deteriorating macro data out of Europe, and a sharp selloff in U.K. government bonds all conspired to make U.S. interest rates much more volatile. The ICE Bank of America MOVE Index (a broad measure of U.S. interest rate volatility) recorded its highest reading since March 2020 in September, touching levels only seen one other time, in the depths of the Global Financial Crisis in 2008.12 It’s no surprise, then, that investors have increasingly turned to ETFs to monitor and adjust risk in fast-moving markets.

Record flows to U.S. Treasury ETFs

Bar chart depicting monthly flows into U.S. Treasury ETFs, including short-, intermediate-, and long-term ETFs since January 2019.

Source: BlackRock, Markit, Bloomberg, chart by iShares Investment Strategy. ETF groupings determined by BlackRock, Markit. As of September 30, 2022.

Chart Description: Bar chart depicting monthly flows into U.S. Treasury ETFs, including short-, intermediate-, and long-term ETFs since January 2019. Bar chart shows steady inflows into U.S. Treasury ETFs. Short-term ETF inflows increased significantly in the last month, adding over $15 billion inflows by the end of September.


HUNKERING AT HOME

While many investors were likely focused on developments closer to home, two key themes have emerged in ETF fund flows abroad during September: a distaste for broad emerging markets and a selectivity in country allocations.

U.S. investors opted for securities closer to home in the last month as emerging market ETFs saw significant outflows, shedding over $2.7 billion over the course of September.13 A strong U.S. dollar and concerns over global growth fueled the international exodus. As the dollar appreciates relative to local currencies, emerging markets may struggle to pay their increasing cost of U.S. dollar-denominated debt.

One bright spot, however, were minimum volatility emerging market ETFs, adding over $750 million in net assets.14 Access to less volatile stocks enticed investors to maintain exposure to the asset class but reduce risk relative to the broader index.

Selectivity has also been key. While country ETFs in aggregate have recorded declining exchange volume and net outflows year to date, country ETFs like Germany, U.K., and Taiwan have seen periodic surges in activity in line with event risks and tactical opportunities.

Emerging market ETFs are out of favor

Bar chart depicting monthly flows into emerging market ETFs, beginning in January 2020.

Source: BlackRock, Markit, Bloomberg, chart by iShares Investment Strategy. ETF groupings determined by BlackRock, Markit. As of September 30, 2022.

Chart description: Bar chart depicting monthly flows into emerging market ETFs, beginning in January 2020. Bar chart portrays significant outflows in September 2022, shedding nearly $3 billion by the end of the month.


FEATURED FUNDS

FEATURED FUNDS

FEATURED FUNDS

Gargi Pal Chaudhuri

Gargi Pal Chaudhuri

Head of iShares Investment Strategy Americas at BlackRock

Kristy Akullian, CFA

Investment Strategy

Contributor

Robert Young

Markets Coverage

Contributor

Mike Malof

Markets Coverage

Contributor

Jon Angel

Investment Strategy

Contributor

Faye Witherall

Investment Strategy

Contributor