What’s causing the selloff — and what to do about it

Over recent weeks, investors have been shaken by the sharp selloffs across global risk assets, with the most speculative assets declining the most. Since the beginning of April, the Nasdaq has tumbled 16% and bitcoin has fallen more than 30%1. We believe the main catalyst for the sell-off in growth assets has been the change in interest rate regime. Higher rates disproportionately impact growth equities because their expected earnings are weighted towards the distant future, making them more sensitive to changes in the long-term discount rate. Since the beginning of April, the 10-year U.S. Treasury yield has moved .53% higher, led by increases in real yields amid Federal Reserve hawkishness and higher-than-expected inflation prints, putting more pressure on growth focused companies, especially ones that are not yet generating positive cashflows2. Thanks to rising rates, bonds have done little by way of ballast, sinking in tandem with equity markets.

Real rates move positive

Line chart exhibiting three lines that represent changes in the yield of the nominal rate, inflation breakeven rate, and real rate between 2012 and May 2022.

Source: BlackRock, Bloomberg. Chart by iShares Investment Strategy, as of May 13, 2022. Nominal rate represented by U.S. Generic 10 Yr. (USGG10YR Index), Inflation Breakeven represented by U.S. Breakeven 10 Year (USGGBE10 Index), and Real Rate represented by Federal Reserve U.S. Treasury H15 Constant Maturity 10 Yr. Real Yield Curve Rates (H15X10YR 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.

Another contributing factor to volatility has been the unwind of Quantitative Easing (QE), a monetary policy strategy used by the Fed to lower borrowing rates and reduce market volatility. From March 2020 to March 2022, QE supported a rally in almost every asset class, from investment grade corporate bonds to U.S. equities. Now, as the Fed shrinks its balance sheet by $47.5bn/month (rising to $90bn/month by August), the process is working in reverse, with interest rates and volatility rising3. The CBOE Volatility Index (VIX), a barometer for market uncertainty, has jumped to the highest level in 12 months. In turn, ETF trading volumes also reached 39% of all equity trading in the month of May, up from a YTD monthly average of 32%4. Generally, spikes in ETF trading volumes signal an uptick in market stress.

The path toward higher rates and greater volatility does not have to proceed in smooth incremental steps. As the current situation shows all too clearly, volatility has historically tended to increase more in episodic jumps than through a steady linear direction. Still, as the market adapts to a higher interest rate regime and tighter financial conditions more broadly, we don’t anticipate the violent swings in price action that have characterized 2022 year-to-date to remain the norm. Economic data in the U.S. remains strong, and volatility notwithstanding, we do not foresee an imminent recession on the horizon.

Second quarter factor flows favor quality and low volatility

Bar chart comparing the cumulative quarterly ETF flow of quality, value, low volatility, and momentum factor funds.

Source: BlackRock, Bloomberg. Chart by iShares Investment Strategy, as of May 13, 2022. ETF groupings determined by Markit.


At times like this, we believe investors would be well served to be in risk management mode, with a diversified approach incorporating defensive factors, dividend exposures, shorter-duration bonds and floating rate funds. Moving to cash is far from the ideal solution, not least because of inflation. Instead, we prefer building portfolio resilience within asset classes, for example, through the quality and minimum volatility factor exposure in funds like the iShares MSCI USA Quality Factor ETF (QUAL) and the iShares MSCI USA Min Vol Factor ETF (USMV). With elevated equity volatility, the min-vol factor has outperformed the broader S&P 500 Index by more than 500 basis points (or 5%) YTD5. Flows also show that investors have turned more defensive with inflows to both quality and min-vol focused ETFs since the beginning of Q2.

Gargi Pal Chaudhuri

Gargi Pal Chaudhuri

Head of iShares Investment Strategy Americas at BlackRock

David Jones

Investment Strategist


Jasmine Fan, CFA

Investment Strategist