ETFs Off to Hot Start in 2018
The exchange-traded fund (ETF) sector has started 2018 much as it ended 2017 – with eager investors plowing cash and confidence into the sector.
US-listed ETFs are off to a record-breaking year, according to Matthew Bartolini of State Street Global Advisors, noting that investors piled $78 billion into ETFs in January—the highest monthly inflow ever. This clearly shattered the previous record of $59 billion set in November 2016.
In his latest US ETF Flash flows report, Bartolini told Traders Magazine that equity-backed ETFs accounted for 86 percent of all flows in January. Not to be left out, bond ETFs attracted $9.1 billion during the month despite concerns surrounding a potential bond bubble.
“After breaking records last year with over $460 billion of fund flows, one would think investors might have called it a day and hit the lodge,” Bartolini said. “Inflows were broad based with all asset classes in the black. Equities accounted for 86 percent of flows with a staggering $67 billion – also a record haul for any month for that category, surpassing the $56 billion record from December 2016.”
In regional equity flows, 2017’s story stayed the same as the US continued to outpace in absolute flows while the pace of growth on a relative basis remained higher in international exposures. On the sector level, technology continues to be the market’s darling, as Technology ETFs attracted over $3.7 billion in January. Investors also increased their exposure to Industrials, Financials and Energy, which brought in $2.7 billion, $1.5 billion and $1.2 billion, respectively.
International fund flows shifted in favor of more targeted single country exposures which took in over $5 billion last month, roughly equal to their calendar year 2017 flow total. SSGA charted that 15 of the top twenty single country ETF inflows were targeted exposures in Asia/ Asian Sub-Continent regions. These flows are consistent with the robust inflows into EM equity funds in January, which grew their asset base by 5 percent intra-month after taking in $9 billion.
“As the global synchronized growth story continues, this trend may continue. Furthermore, the EM segment should continue to be supported by a weak dollar, higher commodity prices and a resurgence in global trade,” Bartolini said. “Stretched valuations in the US make this even more attractive on a relative basis.”
Stretched valuations notwithstanding, he added the euphoric exuberance resulting from increased earnings expectations did lead to funds focused on the US to post $40 billion of inflows on the month, the most flows ever for US equity exposures in the month of January – a month typically associated with outflows on average over the past 12 years.
Fixed income funds weren’t left out of the picture, however. Bartolini said that despite loudening fears that the bond bubble was primed to burst, the segment took in $9.1 billion even as yields perked up with the 10-year US Treasury crossing 2.7 percent for the first time in nearly three years.
“While not record setting, this still represents the segment’s persistent trend that began in 2016 of over $9 billion of inflows a month,” he added. “This is likely to continue well into 2018 as more investors turn to fixed income ETFs for constructing transparent, efficient, and flexible portfolios.”
Geographically, as a percent of AUM, emerging market (EM) bonds continue to see outsized interest. The segment grew by 11.6 percent last month, taking in $2.9 billion. Much of this has been focused in local currency exposure, Bartolini said.
“As dollar weakness and commodity strength bolster the fundamentals of EM issuers. Combined with the $2 billion of outflows in high yield, this trend of EM inflows portends to investors seeking out the asset class for its income generation potential,” he concluded.
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Third of the net inflows to equity funds since 2015 has taken place in the last ten months.