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Purchases of exchange-traded funds (ETFs) fell to their lowest level in April since the depths of the COVID-19 crisis as the war in Ukraine and spiralling global inflation sapped demand.
Net inflows to ETFs and exchange traded products globally slipped to US$27.4-billion in April, according to data from BlackRock Inc., down from US$117.4-billion in March and the lowest figure since March 2020.
Equity funds were hit badly, particularly, with inflows slowing to a trickle of just US$2.8-billion compared with US$76.2-billion a month earlier.
The near-standstill coincided with turbulence in equity markets, with the FTSE All-World Index slumping 8.1 per cent in April, taking its year-to-date losses to 13.2 per cent, amid the growing threat of stagflation.
“We have seen a significant drop-off in headline equity flows,” says Karim Chedid, head of investment strategy for BlackRock’s iShares ETF arm in the Europe, Middle East and Africa region.
Nevertheless, he said although there was an element of de-risking, “I wouldn’t say it’s a dash for cash by any stretch of the imagination.”
The souring mood was most noticeable in the U.S., with a net US$25.6-billion withdrawn from equity ETFs focused on Wall Street, while there were far smaller outflows from European equities and net flows into broad developed market vehicles, emerging markets and Japan.
Morningstar Inc. data showed that three large core U.S. equity ETFs: iShares Core S&P 500 ETF IVV-A, SPDR S&P 500 Trust SPY-A and Vanguard S&P 500 ETF VOO-A each bled between US$10-billion and US$12-billion in April – a far cry from March, when all three had been in the top five nationally for inflows.
The US$10.2-billion pulled from Vanguard S&P 500 ETF was the largest monthly outflow from any Vanguard ETF on record, according to Morningstar.
Moreover, the outflows from these three funds meant iShares, Vanguard and State Street, the three industry leaders, each saw outflows from their global ETF complexes in aggregate in April, its data showed.
Mr. Chedid argues these outflows were driven largely by a technical factor: futures contracts currently trade at a discount to broad market indexes, “so some institutional clients have switched in the past month from U.S. equity ETFs to futures.”
He adds that “flows of this size are typically tied to the derivatives markets. It’s important to keep in mind, however, that these outflows don’t represent investor selling or a shift in sentiment ‒ just a shift in the way they get exposure to the underlying index.”
At the sector level, there were clear signs of investors adopting a more defensive stance. Health care ETFs attracted a net US$3.6-billion, BlackRock reported, while the US$2-billion piped into utilities funds was the most since February 2016 and the third-highest figure on record.
A further US$6.3-billion was pulled out of financials ETFs, meaning the sector is now in the red year-to-date – despite chalking up an all-time monthly record inflow of US$10.9-billion in January.
The US$11.7-billion scooped up by emerging market equity ETFs, up from US$6.6-billion in March, may seem to run counter to this mood of risk aversion. However, BlackRock says it was driven largely by demand for Asia-listed China funds, suggesting some local investors may see signs of value starting to appear in beaten-up Chinese stocks.
Wariness was also the order of the day in fixed income, even if overall inflows only dipped to US$18.8-billion from US$25.5-billion in March.
Government bond ETFs drew in US$15.9-billion, a figure exceeded once before, in November 2018. In contrast, flows to higher-risk investment-grade corporate bonds fell to US$1.2-billion from US$3.3-billion in March, and turned negative in the eurozone.
Further still up the risk curve, high-yield bond funds bled US$3.5-billion, hit by net withdrawals in both the U.S. and Europe.
Circumspection was also the order of the day in terms of duration, with short-term maturity funds attracting US$7.5-billion, far more than the US$1.8-billion soaked up by long-term ones.
Nevertheless, Mr. Chedid says there were signs of some animal spirits starting to return in the most recent data, with investment grade yields of just under 4 per cent looking attractive to some, a trend he thought “had legs,” and duration positioning “coming back 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 a net US$5.2-billion in April.
Within this, Direxion Daily Semiconductor Bull 3x ETF SOXL-A and ProShares UltraPro ETF TQQQ-Q, both of which offer triple exposure to technology-focused indexes, sucked in US$2.3-billion and US$1.9-billion, respectively.
“Investors in these ETFs seem to be channelling the proverbial ‘buy the dip’ mentality, trying to capitalize on these benchmarks’ recent woes,” Mr. Jackson says.
However, with losses mounting ‒ Direxion Daily Semiconductor Bull 3x ETF has fallen 37 per cent since the start of April and ProShares UltraPro ETF 38.4 per cent – Mr. Jackson says investors had been “early to the party” and only “time will tell” if they continue to double-down on such punchy bets.
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