What the ETF Flows Show: Risk Dial Still On

ETF Trends

On the heels of a record-breaking December, global exchange traded product (ETP) flows continued to experience incredible momentum in January, surpassing the milestone figure of $2tn for the first time and finishing the month at $2.04tn in total assets.

This was the industry’s best January ever, with $40.2bn in inflows (breaking last January’s record of $33.5bn).

In addition to the blockbuster numbers, January also mirrored December in the decidedly risk-on nature of flows.  Equities accounted for 94% of flows while the fixed income category remained subdued.  While all equity segments attracted net inflows, emerging markets (EM) ETPs ‘emerged’ as the trend to watch.

Broad EM ETPs drew in $7.0bn, the highest monthly total for the category in more than three years.  EM single country ETPs also saw strong inflows of $5.8bn, with investors favoring China, South Korea and Mexico exposures.

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For those looking to make a more tempered transition into riskier assets, ETPs offering “minimum volatility” strategies have been a vehicle of choice.  These products, which offer a way to access equities with the objective of reducing risk in the form of market volatility, have seen significant inflows in their relatively short lifespan, from ~$1bn at the end of 2011 to nearly $7bn at the end of January 2013.  January inflows alone for minimum volatility ETPs weighed in at $0.8bn.

Another interesting story on the equity flows side was the resurgence of dividend-oriented ETPS, which had experienced outflows in the build-up to the fiscal cliff last month.  With tax uncertainty no longer a barrier, dividend products staged a comeback in January, gathering $2.9bn.

Risk was also a trend within fixed income, where investors favored high yield bonds to the tune of $0.8bn in inflows.  In contrast, the ‘safe haven’ Treasuries category posted outflows for the second month in a row amid concerns that improvements in the US economy could put upward pressure on yields.

Will this risk-on behavior continue?  January market activity has certainly prompted some analysts to believe we’ve entered a period of “Great Rotation” from bonds into stocks.

However, Russ Koesterich believes – and I’m inclined to agree with him – that while we are seeing some investors rediscover equities, the reality is that it may take a while to see the massive shift that some are anticipating.  Rather than one smooth movement, it’s likely to be more of a grudging, volatile process.  Meanwhile, we do still advocate a long-term positive view of equities (you can get Russ’s most recent investment outlook here).

Dodd Kittsley, CFA, is the Head of Global ETP Market Trends Research for BlackRock.

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