Investors pump record amounts into bonds and ‘blue-chip’ stock ETFs

Exchange-traded fund investors poured record amounts into fixed income and “blue-chip” stocks last year as risk appetite soared in the final months of 2023.

But inflation-linked bond funds and broad-based commodity ETFs experienced record outflows as a slowdown in global inflation dampened investors’ appetite to hedge against the corrosive effects on asset prices.

Overall, the global ETF industry recorded net inflows of $965 billion last year, up from $867 billion in 2022, according to BlackRock data. This is the second highest figure in history after 2021’s $1.3 trillion.

Karim Chedid, head of investment strategy for iShares in EMEA at BlackRock, noted the fact that tight monetary policy tends to weigh on stock prices. It will be interesting to compare it to 2021.” and bond prices.

Unlike 2021 and 2022, when equity funds dominated, ETF flows were more balanced last year. Equity funds siphoned off a net $640 billion, below the $1 trillion mark in 2021, while bond ETFs siphoned off a record $332 billion, surpassing 2021’s previous high of $282 billion.

A record year for the bond market was capped off by a sharp increase in risk appetite in the final quarter. Inflows into sovereign debt ETFs, which dominated at the start of the year, fell to $31.9 billion in the fourth quarter, the lowest level since the first quarter of 2022.

However, risky corporate bond flows soared to $29.1 billion in the quarter. The volte-face was particularly pronounced in high-yield bonds, which had seen net outflows of $8 billion year-to-date as of Oct. 27, but inflows of $17.1 billion over the remainder of 2023.

Chedid said investors are “locking in higher yields” before they start to fall in line with inflation and interest rate expectations.

Todd Rosenbluth, head of research at consultancy Vettafi, sees room for further buying.

“The bond market is still in its infancy.” [ETF] It’s being adopted all over the world,” he said. “Investors are embracing bond ETFs in a rising interest rate environment, and returns are likely to be even better in 2024 if the US Federal Reserve begins and continues to cut rates as expected.”

“All the Rise” in the fourth quarter also strengthened equity ETFs. Investors focused on U.S. stocks enjoyed record inflows of $197 billion in the fourth quarter, driven by December’s monthly record $97.2 billion. Riskier emerging market equity ETFs posted $22.3 billion, their third-strongest month on record, according to BlackRock data.

By sector, 2023 was all about technology ETFs, which brought in $52.2 billion, a light year away from the second-popular financial sector’s $3.8 billion.

In terms of investment drivers, high-quality stocks, such as stocks with high return on equity, stable earnings growth, and low leverage, were the most prevalent, with a record $36 billion in net buying.

As a result, the iShares MSCI USA Quality Factor ETF (QUAL) was among the top 10 U.S.-listed ETFs by flow last year, with $11.1 billion in funds, and the blue-chip stocks were classified as “in an uncertain economic environment.” “We did well,” Rosenbluth said. QUAL returned 30.9% last year, outperforming the S&P 500 by 4.6 percentage points.

Funds focused on undervalued “value” stocks had just $5.3 billion in savings, a four-year low, while minimum volatility ETFs had outflows of $16.4 billion.

ETFs that invest based on environmental, social, and governance concerns have also fallen out of favor. Even in the heartland of Europe, ETFs accounted for 61% of ETF inflows in 2022, up from just 29% last year, according to Invesco.

Inflation-linked bond ETFs also lost their appeal as inflation slowed, hemorrhaging a record $20.7 billion.

Rosenbluth said the iShares TIPS Bond ETF (TIP) alone shipped $4.5 billion as investors were “less inclined to protect themselves from the inflationary environment in 2023.”

Slower inflation may also have played a role in the continued woes for products traded on commodity exchanges, which posted a loss of $15.4 billion, the third consecutive year of outflows. Gold funds accounted for most of this, with shipments at $13.5 billion, the second worst on record, while broad general purpose vehicle losses were at a record $3 billion.

“Given gold’s strong performance, this underallocation trend could be seen as a missed opportunity for ETF investors,” said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors. Ta.

Chedid compared gold to value stocks in that both tend to attract capital during periods of inflation, but was still surprised by the unpopularity of gold ETPs, given that prices rose 13% last year. “The relationship between the two parties has broken down,” he said.

Chedid finds reason to believe the bullish environment could continue into 2024.

He said safety-first money market funds attracted nearly $2 trillion last year and have $8 trillion in assets. There will be more rallies.” Meanwhile, in Europe, the average cash allocation in asset portfolios rose to 8% from 3% in 2021.

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Mr. Rosenbluth was also optimistic, but expected stock rotation. “I think we are seeing strong demand and strong performance for value investing. [These stocks] Business performance tends to improve in an environment of declining interest rates. “Value strategies favor financials, consumer staples and energy,” he said.

However, Chedid warned that BlackRock’s internal view is that the six interest rate cuts priced in for the US this year are “going too far.”

“We don’t think inflation will decline steadily. Labor supply is tight in the U.S.,” he said.

More broadly, “from a macro perspective, it’s hard to argue that there will be no volatility at all this year,” but unlike in the era of quantitative easing, central banks may not be able to respond to this.

“This is a headwind to the increased risk that we saw in the fourth quarter,” Chedid said.

Bartolini shared these concerns. “The U.S. stock market, the driving force behind soaring global stock returns, will enter 2024 with elevated valuations,” he said. “And given that 76 countries will hold elections in 2024, geopolitical risks are likely to increase even further.”