ETFs Hit $500B In Flows This Year

Looking back at a beyond-stunning few months for the industry.

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Reviewed by: Dan Mika
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Edited by: Dan Mika

2021 inflows crossed $500 billion for U.S.-based ETFs on Monday, doing so with breathtaking speed.

2020 closed out with $504 billion in inflows for the entire year. To see that figure surpassed in just over half of that time in 2021 is a sign that even though ETFs benefited from financial markets riding the recovery from COVID-19, they are reaching a level of widespread adoption at breakneck pace.

 

Asset Classes (Year-to-Date)

 Net Flows ($, mm)AUM ($, mm)% of AUM
U.S. Equity228,516.883,877,191.375.89%
International Equity146,728.691,274,200.7911.52%
U.S. Fixed Income93,944.351,057,660.988.88%
International Fixed Income24,526.34146,633.0716.73%
Commodities-1,687.40140,896.83-1.20%
Currency92.441,973.854.68%
Leveraged447.5461,057.780.73%
Inverse4,389.8811,758.1437.33%
Asset Allocation2,848.9817,260.2116.51%
Alternatives2,140.586,499.1532.94%
Total:501,948.296,595,132.177.61%

 

 

Equity Bulls On Parade

U.S. stocks were primed to take off at the beginning of 2021 due to a confluence of cash and optimism. After a difficult phased start, Americans started to get vaccinated against COVID-19 en masse early in the year, while the $1.9 trillion American Rescue Plan passed in early March issued another $1,400 in stimulus dollars to most adults.

That wider confidence came from ETFs remaining fairly liquid in the months following mass lockdowns around the world in March 2020, said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

“In hindsight, the [key takeaway of the] COVID-19 driven volatility we saw in the equity and fixed income markets in the first quarter of 2020 ... was that not only did ETFs not break, they didn't even bend too much,” he added.

The stress of March 2020 generated more interest in broad-based equity ETFs, along with more interest in fixed income ETFs that became a primary tool for investors seeking to gain exposure to bonds when the underlying markets were suffering from deep volatility.

While U.S. equities were the main driver of the $500 billion inflow mark in the first half of 2021, growing vaccination rates abroad have the potential to set up similar confidence booms in the latter half of the year.

BlackRock, whose iShares brand of ETFs is the largest in the world by assets, cited that logic when it raised its outlook on European stocks to “overweight” and cut its view on U.S. stocks to “neutral” in its midyear report.

iShares Americas head Armando Senra said the firm expects a slowdown in U.S. equities as other countries recover economically from COVID-19, but he believes that net inflows for U.S.-listed funds will keep going via flows to foreign equity-focused funds.

“The economic restart is shifting to Europe, Japan and other places around the world,” he noted. “You're beginning to see more and more portfolios reallocated and more overweight in those other parts of the market.”

Retail Interest

While the vaccine was just starting in mid-January, individual investors on no-commission trading apps like Robinhood and competing brokerages took away the breath of Wall Street institutions by buying up shares of heavily shorted GameStop stock and forcing hedge funds into deep losses after having to rebuy shares at heavy premiums to cover their short positions.

Thus, the meme stock was propelled into the financial mainstream.

Although other securities have been buoyed by a new generation of retail investors through Reddit and similar forums, those who aren’t as apt to make flashy, risky bets for social media clout are finding ETFs a compelling alternative.

Liz Young, head of investment strategy at SoFi, thinks that while the meme stock phenomenon is here to stay as a new generation gets into the financial world, ETFs provide a way to prevent someone from taking a crushing loss on a YOLO play.

“The concentration risk that I don't want people to have is something that can be solved by investing in ETFs to create more diversification,” she said.

Thematic investing funds also gained steam among retail investors. SoFi itself has gotten into the game with its SoFi GiG Economy ETF (GIGE) and the SoFi Social 50 ETF (SFYF). The latter fund reconstitutes every month to an index of the top 50 stocks that its retail brokerage customers hold, and currently includes hefty weightings in both GameStop and AMC.

 

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

 

Young said the faster flow of information that an ETF provides versus a mutual fund fits into the demands of newer investors, especially those without the cash to build a portfolio without resorting to fractional shares.

“An ETF gives you information in the moment, and I think that's what a lot of investors are hungry for, especially right now when we're very short term focused,” she explained.

How Long Can This Growth Last?

There are more than five months left in the calendar year. With that much time left, how much room is left for inflows to climb?

The rate of inflows could be stymied by a slowing recovery in the U.S., and the threat of the highly transmissible delta variant of the COVID-19 virus could force parts of the country with low vaccination rates back into restrictions.

Other market risks could also shake the confidence of investors, like the hot debate over whether the spike in inflation in recent months will pass as the economy readjusts from lockdown or if it’s here to stay.

But on the flip side, mutual fund managers now have a clearer path toward converting existing funds into ETFs after Dimensional Fund Advisors converted four of its funds this year. The move gave the quant firm $29 billion in ETF assets at the time, and may serve as another outlet for mutual fund dollars to flow into ETF wrappers.

Ben Johnson, Morningstar’s director of Global ETF Research, expects inflows to continue for the next few years, but not likely at the breakneck rate of growth seen so far in 2021.

He also believes that marginal growth in flows will continue as more investors ranging from retail to advisors seek out hot ESG and active funds, along with interest from mutual fund giants like Capital Group in launching their own ETF businesses in 2022.

“ETFs have officially arrived; these are mainstream,” Johnson said. “At the margin, I think for a lot of advisors and individuals in particular, they’ve become the vehicle of choice.”

Contact Dan Mika at [email protected], and follow him on Twitter

 Net Flows ($, mm)AUM ($, mm)% of AUM
U.S. Equity228,516.883,877,191.375.89%
International Equity146,728.691,274,200.7911.52%
U.S. Fixed Income93,944.351,057,660.988.88%
International Fixed Income24,526.34146,633.0716.73%
Commodities-1,687.40140,896.83-1.20%
Currency92.441,973.854.68%
Leveraged447.5461,057.780.73%
Inverse4,389.8811,758.1437.33%
Asset Allocation2,848.9817,260.2116.51%
Alternatives2,140.586,499.1532.94%
Total:501,948.296,595,132.177.61%

Equity Bulls On Parade

U.S. stocks were primed to take off at the beginning of 2021 due to a confluence of cash and optimism. After a difficult phased start, Americans started to get vaccinated against COVID-19 en masse early in the year, while the $1.9 trillion American Rescue Plan passed in early March issued another $1,400 in stimulus dollars to most adults.

That wider confidence came from ETFs remaining fairly liquid in the months following mass lockdowns around the world in March 2020, said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

“In hindsight, the [key takeaway of the] COVID-19 driven volatility we saw in the equity and fixed income markets in the first quarter of 2020 ... was that not only did ETFs not break, they didn't even bend too much,” he added.

The stress of March 2020 generated more interest in broad-based equity ETFs, along with more interest in fixed income ETFs that became a primary tool for investors seeking to gain exposure to bonds when the underlying markets were suffering from deep volatility.

While U.S. equities were the main driver of the $500 billion inflow mark in the first half of 2021, growing vaccination rates abroad have the potential to set up similar confidence booms in the latter half of the year.

BlackRock, whose iShares brand of ETFs is the largest in the world by assets, cited that logic when it raised its outlook on European stocks to “overweight” and cut its view on U.S. stocks to “neutral” in its midyear report.

iShares Americas head Armando Senra said the firm expects a slowdown in U.S. equities as other countries recover economically from COVID-19, but he believes that net inflows for U.S.-listed funds will keep going via flows to foreign equity-focused funds.

“The economic restart is shifting to Europe, Japan and other places around the world,” he noted. “You're beginning to see more and more portfolios reallocated and more overweight in those other parts of the market.”

 

Dan Mika is a reporter for etf.com. He has previously covered business for the Ames Tribune and Cedar Rapids Gazette in Iowa, and BizWest Media in Fort Collins, Colorado. Dan holds a bachelor's degree in journalism from Truman State University.