January 19, 2023

Q3 2022 ETF Sub-Asset Class Flow Trends

Our last 13F update we highlighted trends in alternative strategies in the ETF space as allocators have been seeking ways to lower their correlation to equities and fixed income through 2022 and Q3 accelerated this trend as the average equity and fixed income fund suffered a -5.89% and -2.42% loss, respectively.

While traditional asset class have been performance challenged, allocators continue to look ahead and have been right sizing their exposure across both equity and bond ETFs all through 2022 which the 13F flow data reinforces these observations:

CHART 1:

The one trend that has been consistent all through 2022, and continued this quarter, was the shift from actively managed strategies to passive as we saw net $181 B leave active funds and shift a net $89 B into passive strategies. Taking the market impact into account, the total net assets tracked via 13Fs during the quarter for ETFs dropped approximately -4% from $6.1 trillion at the end of Q2 to $5.91. However, this is an improvement over the Q1 to Q2 drop we saw of -12% in net assets.

From an asset class perspective, equity ETFs continue to hold the bulk of assets at 75% of assets, with fixed income ETFs continuing to grow and are at 20% of assets. When we analyzed actively managed ETFs, we saw that revenue from these increase to 12.50% of all ETF revenue. This stuck out to us, as they grew share in a net declining market and tells us that asset managers continue to launch or convert strategies into active ETF wrappers.

As we drill down to the main asset classes for ETF flows via 13F, despite the market news flow the net flows into equity ETFs not only continued, they added over $20B in net positive flows. Some additional observations:

Taxable bonds increased net $18B
Muni bonds decreased by net $8.2B as muni/treasury ratios tightened again
Alts retained the same share as they did in Q2
Commodity related ETFs saw the largest decrease in net flows as the Ukraine/Russian conflict was less of a headline factor and net flows were down double the amount from Q2

CHART 2:

ETF-Asset Class	Q2-2022	% of flows	Q3-2022	% of flows
US Equity	38,146,449,350	41%	59,600,266,731	55%
Taxable Bond	36,296,697,319	38%	54,301,000,000	50%
Municipal Bond	9,436,332,117	13%	198,600,000	1%
Alternative	3,252,675,683	3.4%	3,510,200,000	3.1%
Commodities	-4,396,432,769	-6%	-12,100,320,000	-11.3%
Sector Specific Equity	-19,634,870,314	-21%	-11,510,366,000	-10%
Leveraged-Trading	8,664,493,269	12%	5,740,560,465	5%
Intl Equity	15,940,187,700	17%	3,400,282,000	3%

Similar to last quarter, the flows we saw via ETFs were not mirrored in mutual funds as Lipper reported continued net outflows in all major asset classes with the exception of Alts and Non-traditional (ie long/short options).

Looking under the hood at the sub-asset classes with the largest flow trend changes, there were some dramatic shifts during the quarter:

Large blend funds ie the SP500 and broad indices experienced the largest increase with flows jumping 29%
Sector wise, Financials were favored as net flows increased 15% to a net positive as many view the sector as a benefactor of higher rates
Investment Grade corporate bonds also flipped to net positive flows with higher real yields attracted allocators
Ultra Short Duration flows were reduced by 10%, as many allocators had shifted here a few quarters ago and the sector was used as a source of funds to buy maturities a bit longer in duration across the curve

CHART 3:

Sub -Asset Class Flows of Note	Q2-2022	% of flows	Q3-2022	% of flows
Large Blend	2,275,000,000	5.6%	23,428,516,732	34%
Financials	(14,670,050,800)	-15.3%	3,898,469,526	1%
IG Corp Bond	(1,960,765,500)	-2%	3,256,000,000	3%
European Equity	(7,950,200,000)	-8.5%	(4,000,750,233)	-3.7%
Large Value	22,090,077,100	23%	9,750,340,600	9%
Ultra Short Bond	21,985,600,000	23%	14,350,800,200	13.2%
Muni Bonds-int term	9,236,000,000	9.1%	94,250,220	.10%
Bank Loan/ Lev Loan	(2,445,761,501)	-2.6%	(2,826,800,000)	-2.5%