ETF flows smash full year record

Calendar year inflows into exchange traded funds surpassed their previous full-year record at the end of October, even before a buying spree that was ignited by the election of Donald Trump as the next US President.

Barring a sharp turnaround, the final full-year net flows tally looks destined to be meaningfully higher still, after $22.2bn was pumped into US-listed ETFs last Wednesday, the day after the election, according to State Street Global Advisors, shattering the previous post-election day record of $4.9bn in 2020.

As of October 31, global net flows into the burgeoning ETF industry had hit $1.4tn, according to data from BlackRock, eclipsing 2021’s full-year record of $1.33tn.

“It’s on track to be a record year,” said Karim Chedid, head of investment strategy for BlackRock’s iShares in the Emea region, after October flows came in at $188bn, the second-highest figure ever, beaten only by July’s $199bn, despite many equity and bond indices slipping during the course of the month.

“Even as flows hit records, month-on-month overall [ETF] assets fell slightly, from $13.5tn to $13.3tn, owing to mildly negative October returns across most Morningstar categories,” said Syl Flood, senior product manager at Morningstar, whose data do not include China or India-listed funds.

Appetite for fixed income ETFs has been particularly strong this year, with net inflows of $376bn, ahead of the previous record of $331bn last year, according to BlackRock’s figures.

Chedid believed the buying spree was driven by a desire to lock in higher yields while they were still available, given the prevailing trend of monetary easing across most major economies.

In October there was unusually strong demand for European-listed high-yield bond ETFs, with the $2.1bn of net buying the second-highest figure on record.

“High-yield took the lion’s share of flows in credit, with a lot of that in European high-yield,” said Chedid who attributed the enthusiasm to the release of economic data in Europe that pointed to “Goldilocks growth”, perceived as “just right” from the perspective of high-yield bonds.

Commodity ETFs are also on track to add to 2024’s full-year tally, thanks to a recent upturn in sentiment as the gold price has accelerated to fresh all-time highs. October’s net inflows of $6.4bn into the broad commodity complex means the asset class is now in the black in terms of flows for the year-to-date, at $5.4bn.

If this trend holds up, commodity ETFs will notch up their first positive year since 2020, having experienced combined outflows of $28.4bn from 2021-23.

The bulk of inflows so far this year, though, have been sucked up by equity ETFs, which have pulled in $927bn.   

US equity funds, with inflows of $75.5bn, as usual grabbed the bulk of the money in October but emerging markets pulled in a punchy $29.4bn, helped by stimulus measures from the central bank that ignited a rally in China’s sagging stock market.

“It was a record month for Greater China equity flows,” said Flood. “October’s $11.7bn [from ETFs listed outside China] more than doubled the previous monthly high of $4.9bn in June 2022.”

The iShares China Large-Cap ETF (FXI) hoovered up $5.5bn, the third-highest tally of any ETF in the world in October, according to Morningstar, ahead of the SPDR S&P 500 ETF Trust (SPY), the world’s largest ETF, and behind only Vanguard’s and iShares’ S&P 500 trackers.

This allowed 20-year-old FXI, the 317th largest ETF in the world, to more than double its assets to $9.9bn in the course of a single month. The 11-year-old Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) was another fund that doubled in size during the course of October, Flood said.

Looking purely at US-listed ETFs, Matthew Bartolini, head of Americas ETF research at SSGA, said “China-focused ETFs’ trailing three-month inflows were the worst they had ever been at the end of the summer. Yet, after $3bn came in during the final week of September and $10bn in October following the stimulus announcement, the trailing three-month time series bounced off its nadir,” an understatement given that three-month inflows are now more than double their previous peak, in 2021.

“The jump higher was driven by exuberance and a great deal of short covering, as short interest on China ETFs at the end of the summer was significantly elevated,” Bartolini added.

The enthusiasm did not extend to other emerging markets, however, with China accounting for 104 per cent of all single-country EM ETF flows in October, Bartolini said, meaning that single-country funds covering the rest of the developing world suffered outflows, in aggregate.

Chedid was unsure whether this year’s record tally was a sign that ETF flows would continue to accelerate, however.

While he said “the story on ETF adoption continues to be structurally positive”, with ETFs grabbing market share from more traditional mutual funds, he believed this year’s buying had been turbocharged by strong market returns, something that will not happen every year.

“There is a market momentum factor behind it. We have seen double-digit returns for equities in the US for a second year as we continue to recover from 2022 [and] increasingly it’s US equities that have been driving a lot of the flows,” Chedid said.

With the current US earnings season comfortably surpassing relatively muted expectations, “I think that is ultimately the driver of the strong flows,” he added.

Flood was more confident of a repeat of October’s “cornucopia of superlatives”, however, particularly after Trump’s election victory.

“With Trump coming in it certainly does look like it will be business-friendly, much like 2017,” he said.

“Despite concerns that the S&P 500 index returns are dominated by the big players, there is even more money going in there than ever. There’s an ‘if you can’t beat them, join them’ attitude going on in that regard.”