Investment in ETFs drops to lowest level since start of Covid crisis

Purchases of exchange-traded funds fell in April to their lowest level since the depths of the Covid crisis, as the war in Ukraine and spiraling global inflation sapped demand.

Net inflows into ETFs and exchange-traded products overall fell to $27.4 billion in April, according to BlackRock data, from $117.4 billion in March and the lowest figure since March 2020.

Equity funds were particularly hard hit, with inflows slowing to just $2.8 billion from $76.2 billion a month earlier.

The near-stop coincided with turmoil in equity markets, with the FTSE All-World Index falling 8.1% in April, taking its year-to-date losses to 13.2%, amid growing threat of stagflation.

“We have seen a significant drop in equity flows,” said Karim Chedid, head of investment strategy for BlackRock’s iShares ETF arm in the Emea region.

Nonetheless, he said that while there was an element of risk reduction, “I wouldn’t say it’s a dash for money by any stretch of the imagination.”

The bad mood was most noticeable in the United States, with a net outflow of $25.6 billion from Wall Street-focused equity ETFs, while outflows from European equities and net flows into vehicles of developed markets, emerging markets and Japan are much weaker.

Morningstar data showed that three major core US equity ETFs: iShares Core S&P 500 (IVV), SPDR S&P 500 (SPY) and Vanguard S&P 500 (VOO) each bled between $10 billion and $12 billion. dollars in April – a far cry from March when all three had been in the top five nationally for entries.

The $10.2 billion raised from VOO was the largest monthly outflow of any Vanguard ETF on record, according to Morningstar.

Additionally, the outflows from these three funds meant that iShares, Vanguard and State Street, the three industry leaders, each saw outflows from their global ETF complexes in total in April, according to its data.

Chedid argued that these outflows were largely driven by a technical factor: Futures contracts are currently trading at a discount to major equity indices, “so some institutional clients have moved over the past month from US stock ETFs to futures,” he said.

“Flows of this size are usually tied to derivatives markets,” Chedid added. “It’s important to keep in mind, however, that these exits do not represent a sell-off by investors or a change in sentiment – ​​just a change in how they are exposed to the underlying index.”

At the sector level, there are clear signs that investors are adopting a more defensive stance. Healthcare ETFs attracted $3.6 billion net, BlackRock said, while the $2 billion flowed into utility funds was the highest since February 2016 and the third-highest figure on record.

A further $6.3 billion has been withdrawn from financial ETFs, meaning the sector is now in the red year-to-date – despite a record monthly inflow of $10.9 billion in January.

The $11.7 billion fetched by emerging market equity ETFs, up from $6.6 billion in March, may seem to run counter to this risk aversion trend. However, BlackRock said it was largely driven by demand for Asian-listed Chinese funds, suggesting some local investors may see signs of value starting to appear in battered Chinese stocks.

Mistrust was also the order of the day in fixed income securities, even though overall inflows only fell to $18.8 billion from $25.5 billion in March.

Government bond ETFs attracted $15.9 billion, a figure surpassed once before, in November 2018. In contrast, flows into high-risk, investment-grade corporate bonds fell from 3, $3 billion in March to $1.2 billion, and turned negative in the Eurozone.

Still higher on the risk curve, high-yield bond funds lost $3.5 billion, hit by sharp drawdowns in the United States and Europe.

Caution was also the order of the day in terms of duration, with short-term funds attracting $7.5 billion, far more than the $1.8 billion absorbed by long-term funds.

Nonetheless, Chedid said there were signs of some animal spirits returning in the most recent data, with investment-grade returns of just under 4% looking attractive to some, a trend he believed “having legs” and a duration positioning “returning from extreme levels”.

Ryan Jackson, manager research analyst at Morningstar, also pointed to some signs of risk appetite in the U.S. ETF market, with leveraged equity funds attracting $5.2 billion net in April.

As part of this, ETF Direxion Daily Semiconductor Bull 3x (SOXL) and ProShares UltraPro (TQQQ), which both offer triple exposure to tech-focused indices, sucked in $2.3 billion and $1.9 billion, respectively. of dollars.

“Investors in these ETFs seem to be channeling the proverbial ‘buy the dip’ mentality, trying to capitalize on these benchmarks’ recent woes,” Jackson said.

However, with losses mounting – SOXL has fallen 37% since the start of April and TQQQ has fallen 38.4% – Jackson said investors were “early in the party” and that “time will tell.” if they keep doubling down on such hard-hitting bets.