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What the ETF Flows Show: Investors Preparing for Fiscal Cliff


Under the shadow of the looming fiscal cliff, exchange traded product (ETP) flows continued at a record-setting pace through November, with $25bn for the month and $218.9bn for the year.  The previous record of $208bn was set in November 2008 as the earlier stages of the global financial crisis unfolded.

Fixed income remained a key differentiator for the year, inching closer to record setting territory with $67.8bn of flows year-to-date, well ahead of the $50bn collected in 2011.  While all segments of the ETP fixed income market have grown, this year’s flows have been focused in categories like investment grade corporates, high yield and emerging markets – essentially, the higher yielding segments of the bond market.

In the months leading up to November’s election, we saw bond ETF investors flock to these riskier, higher income sectors of the market.  However, flows quickly shifted just ahead of the election as it became apparent that neither political party would emerge with enough strength to immediately avert the fiscal cliff.

Investors concerned about higher taxes and spending cuts turned to Treasury bond ETPs, which absorbed $2.7bn in November with over $1.6bn of that coming in during the three days that preceded the election (see below).

Meanwhile, high yield bond ETPs saw redemptions of $0.04bn for the month, a modest amount compared to the $13bn the category has brought in YTD.

Despite this lull, other high yielding products with less perceived risk continued to see inflows – areas like bank loans, short duration high yield and emerging market bond ETPs.

So while flows in November were a bit of a mixed bag, one thing remained clear: investors continue to look to ETPs to provide the flexibility they need to make tactical portfolio changes in uncertain times.  And with what lies ahead, we can only expect this trend to continue.

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