Hand-Wringing Over Equity ETF Flows Misses Bigger Story

Divergence of ETF and mutual fund flows is a big picture some fail to see.

Reviewed by: Matt Hougan
Edited by: Matt Hougan

A recent Financial Times article touting a huge drop in equity ETF inflows drew a cascade of emails to my inbox.

The story—New Money Raised By Equity ETFs Drops 85%—was published on Aug. 11 and looked at net flows into ETFs through June 30 of this year. Citing ETFGI data, the article notes that equity ETFs pulled in a net $15 billion in inflows in the first half of 2016, compared with $102 billion invested over the same period in 2015.

That data are of course true, but the conclusions the article draws are not.

Noting, among other things, a high level of short interest in shares of WisdomTree (the only publicly traded pure play in the ETF industry), the article calls it “a rare sign of pressure on the passive investment industry.” The original version of the article (since edited) said there was “increasing concern about the strength of the passive industry.”

That’s just silly.

Putting Equity ETF Flows Into Perspective

The slowdown in flows into equity ETFs in the first half of the year is worth noting, but it is also worth putting the situation into context. Consider three facts:

  1. July inflows into ETFs were incredibly strong, with $53 billion flowing into ETFs in the U.S. (including $33 billion into equity ETFs).
  2. First-half yearly flows into equity ETFs look positively glowing compared to mutual funds, which saw net outflows of $67 billion over the same time period, according to the Investment Company Institute. If you include July’s numbers, that gap grew: Equity ETFs have had net inflows this year of about $34 billion in the U.S., while equity mutual funds have had net outflows of $110 billion.
  3. Net-net across all asset classes, flows into ETFs this year are about on pace with last year: Through Aug. 3, U.S.-listed ETFs had pulled in $112 billion in net new money, according to the ICI, compared with $119 billion during the same period last year.

While “ETFs slowing down” sounds exciting, at least in the U.S., the data seem to suggest otherwise. Barring a market collapse, my guess is we’ll end the year at a new record for net inflows.

ETF, Mutual Fund Flow Divergence

All that said, the data highlighted in the article do suggest something important: In the first half of the year, investors soured on equities. And interestingly, here the actions of ETF and mutual fund investors diverged in interesting ways.

According to the ICI, domestic equity ETFs had net inflows of $8 billion in the first half of the year, while international equity ETFs had $6.5 billion in net outflows. By contrast, domestic mutual funds saw $79 billion in net outflows, while international mutual funds saw $12 billion in net inflows.

Two Other Interesting Wrinkles

That’s a story worth reporting, and one that owes much of its explanation to the rapid decline of interest in currency-hedged exposure overseas (which is dominated by ETFs, and which saw massive outflows) and perhaps some hankering for active management to navigate the complexities of a post-Brexit world (?).

But “increasing concern in the passive industry”? I’m not so sure. 2015 set a record for the gap between flows into active and passive equity instruments, with passive funds pulling in $398 billion at the same time active funds lost $89 billion in outflows. All data suggest that’s continued into 2016.

That’s not a sexy story, but it does appear to be true.

Matt Hougan is CEO of InsideETFs and can be reached at [email protected].


Matt Hougan is CEO of Inside ETFs, a division of Informa PLC. He spearheads the world's largest ETF conferences and webinars. Hougan is a three-time member of the Barron's ETF Roundtable and co-author of the CFA Institute’s monograph, "A Comprehensive Guide to Exchange-Trade Funds."