Stock Market Trends Reflect A Wild First Quarter For ETFs

ETF flows are mirroring the instability experienced by bond and stock investors at the conclusion of the first quarter.

‍

A gauge for investor sentiment has emerged in the $7 trillion ETF market. The good news is that equities and bond ETFs still enjoyed overall inflows during the initial quarter despite significant market fluctuations.

‍

The bad news is that inflows have been much lower than in recent years since near the end of March, several investors parked huge sums of money in other products like money market funds.

‍

ETFs are still making money, albeit more slowly.

‍

Nate Geraci of the ETF Store estimates that as of March 24, ETFs will have generated a total of $70 billion in revenue in 2023.

‍

ETF inflows so far this year: $70 billion

‍

Comprised of:

‍

Equity: inflows of $24 billion

‍

Fixed Income: Inflows of $43 billion

‍

More (money, etc.): $3 billion in inflows

‍

Even if there is still some inflow, it is significantly less than in previous years. For instance, by this time last year, inflows had reached around $200 billion. With inflows of over $600 billion, 2023 came to a close.

‍

Particularly in the area of stock inflows, there was a striking split: $27 billion went into international funds while $3 billion left U.S. equities funds.

‍

Geraci tells me that one likely explanation is that investors have become much more cautious as a result of the simultaneous decline in equities and bonds in 2022.

‍

On the equities side, he claimed, "I believe the low flows reflect uncertainty in the market, particularly concerns of a downturn on the horizon."

‍

A significant increase in capital flowing into money market funds, which are historically seen as a safe haven asset, is indicative of much of that anxiety. This year, but especially in March as the financial meltdown intensified, flows have grown. The week ended March 15 saw investors pump $108 billion in money market mutual funds, ranking as the fifth-largest net inflows since records began in 1992, according to Trade Algo.

‍

Treasurys and overseas were the biggest winners in Q1

My mother is in the lead.

‍

A month ago, I made light of my mother on air. She had called to let me know she was renewing a 1-year bank CD and expressed surprise that they were giving her returns of more than 4% after years of receiving returns of less than 1%. She inquired about making direct Treasury investments. Even the bank teller at her bank volunteered to call her when yields increased.

‍

When my mother starts keeping an eye on bonds, that's a yield top. That is comparable to the shoeshine boy discussing the stock market.

‍

My mom was correct. With $39 billion in revenue in the first quarter, over half of it coming from short-term Treasury securities, Treasury ETFs were the big winners.

‍

Many investors find it highly alluring when they can purchase short-term Treasury bonds for 4 to 4 1/2 percent yields with little risk, according to Geraci.

‍

He had to be conversing with my mum.

‍

• Treasury ETFs saw a lot of Q1 inflows.

‍

• Treasuries 20+ iShares (TLT)

‍

• 7-10 Year Treasury Bond iShares (IEF)

‍

• iShares Treasury Bond ETF for 0–3 Months (SGOV)

‍

• Short-Term US Treasury ETF by Schwab (SCHD)

‍

Most other bond funds had outflows, but mainly corporate & high yield funds.

‍

• Bond ETFs saw outflows in Q1

‍

• Vanguard Corporate Bond, Short-Term (VCSH)

‍

• Bond ETF SPDR Bloomberg High Yield (JNK)

‍

• iBoxx USD High Yield Corporate Bond ETF from iShares (HYG)

‍

Large inflows of $27 billion were also made to international equities funds.

‍

That's not a great surprise because global equities have outperformed since the fourth quarter of last year, and many Wall Street analysts have been discussing increasing their overseas investments for some time due to worries about U.S. recessions and a declining currency.

‍

Given the weakening outlook for profits, high valuation, and risks associated with interest rate hikes, we also encourage investors to diversify outside of US equities and growth stocks, according to Mark Haefele, CIO for global capital management at UBS.

‍

Is ESG fading away?

‍

It's not a high-yield or bond fund that has the distinction of having the largest quarter-to-date outflows among individual ETFs.

‍

That distinction belongs to the iShares ESG Aware MSCI USA ETF, which experienced outflows of around $6 billion.

‍

Geraci informed me that ESG had serious problems, not just with politics but also with performance. ESG has often performed worse than the market.