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Investors pulled US$15.8-billion from U.S. high-yield ETFs, which hold higher risk corporate bonds, in the first six months of the year as well as US$1.1-billion from emerging market bond ETFs.aprott/iStockPhoto / Getty Images

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New business for exchange-traded fund (ETF) providers dropped by almost 30 per cent in the first six months of the year as equity and bond markets both fell sharply in response to soaring inflation and rising interest rates.

Global net inflows into ETFs reached US$463.8-billion in the first half of 2022, down 29.6 per cent from the same period last year, according to ETFGI LLP, a London-based consultancy.

Deborah Fuhr, founder of ETFGI, says the “dismal performance by equity and bond markets in the first half of the year, the Russia-Ukraine war and China’s zero-COVID-19 policy” had also weighed on the ETF industry.

Declines in stocks and bonds this year overshadowed inflows, pushing global ETF assets to US$8.6-trillion, down from US$10.3-trillion at the end of December.

But Ms. Fuhr notes that ETFs overall had so far attracted more new business than they did in the same period in 2019 and 2020 in a sign of the broader shift from traditional fund styles to products that trade on exchanges.

The Vanguard Group Inc. holds a narrow lead over its arch-rival BlackRock Inc. at the midpoint of the 2022 race among ETF providers to drum up new business.

Valley Forge, Penn.-based Vanguard gathered ETF inflows of US$118.6-billion in the first six months of the year, down 37 per cent from the same period last year. New York-based BlackRock registered ETF inflows of US$109-billion, a drop of 29.6 per cent compared with the first half of 2021.

The duo have fought a cut-throat battle over the past decade using aggressive ETF fee cuts to attract investors, a duel that’s driving changes across the entire investment industry as rival managers are forced to adapt their business models in response to intensifying competitive pressures.

The slowdown has been more pronounced for State Street Global Advisors, the world’s third-largest ETF provider ranked by assets. ETF inflows for State Street dropped by 80 per cent to just US$8.8-billion.

The sharp reduction in risk-taking among investors this year has added a new dimension to competitive pressures across the ETF industry after a decade when strong gains for equity markets have turbocharged asset growth.

Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, says that de-risking by investors was particularly evident in U.S. sector ETFs, which are used widely to make tactical bets by financial advisors and wealth managers.

ETFs linked to defensive sectors – where earnings are considered less vulnerable to an economic slowdown or recession – registered positive inflows in the first half of the year. Health care sector ETFs gathered inflows of US$9.1-billion while consumer staples ETFs attracted inflows of US$5.6-billion, and utilities ETFs took in US$2.5-billion.

Conversely, ETFs linked to cyclical sectors posted outflows, with investors withdrawing US$7.3-billion from consumer discretionary ETFs and US$7.3-billion from industrials ETFs. U.S. financials ETFs also registered large outflows of US$12.7-billion in the first half of 2022.

Reductions in risk appetite were also evident in fixed income ETFs flows.

Investors pulled US$15.8-billion from U.S. high-yield ETFs, which hold higher-risk corporate bonds, in the first six months of the year as well as US$1.1-billion from emerging market bond ETFs. Short-term U.S. government bond ETFs, the safest corner of fixed income markets, gathered inflows of US$60.6-billion in the first half.

“The high-yield outflows were the worst ever [for that sector] for any half year on record,” Mr. Bartolini says.

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