ETF watch: Investors seek safe havens and commodities while ESG demand dips

The behaviour of exchange traded fund (ETF) investors often tends to reflect what’s happening in both the active management space and wider markets. But that's not totally the case so far in 2022, with figures from the opening three months of the year pointing to some surprising nuances in investor behaviour.

With the sheer extent of inflation becoming difficult to ignore, investors in ETFs and other funds have made some fairly intuitive moves in recent months, with appetite for quality growth funds and fixed-income allocations appearing to tail off somewhat. But this has not resulted in outright selling of ETFs: some investors are continuing to favour even those subsectors that look increasingly under pressure.

Bond ETF sales fell from €8.4bn (£6.95bn) in the final quarter of 2021 to €5.1bn in the first three months of this year. But the fact that this was a positive figure contrasts with data on other parts of the funds market. Investment Association data shows that UK investors pulled £1.6bn net from open-ended fixed-income funds in January and February 2022, unsurprising given the growing sell-off in this space.

Various bond ETF categories have registered net outflows over the first quarter (Q1) in Europe, from US dollar inflation-linked bond funds to various high-yield bond categories. A handful of funds registered notable outflows, from short-duration plays such as the iShares $ Treasury Bond 1-3yr UCITS ETF (IBTS) and Pimco US Dollar Short Maturity UCITS ETF (MIST), to inflation-linked and high-yield bond funds. Funds that suffered outflows included the iShares $ High Yield Corp Bond UCITS ETF (SHYU), iShares Global High Yield Corp Bond UCITS ETF (IGHY) and iShares Fallen Angels High Yield Corp Bond UCITS ETF (RISE), which invests in debt that has been downgraded from investment grade to high-yield ratings but may make a comeback. Investors also exited what was a popular fund in 2021 – the iShares China CNY Bond UCITS ETF (CNYB).

While it might seem surprising to see investors calling time on high-yield, a fixed-income subsector often viewed as being more resilient against inflation and rising rates, this could reflect concerns that a recession seems more likely. The same thinking might explain the enduring popularity of US government bonds. US government and corporate bond funds were the two most popular fixed-income categories during Q1, and a variety of other government bond ETFs also remained popular, as the chart shows.

In a commentary on the latest data, Jose Garcia-Zarate, associate director of passive strategies at Morningstar, noted that the bulk of fixed-income investment going into developed market bond ETFs “may look a bit odd, but simply confirms that in times of market stress US assets will always prove to be the ultimate safe haven for investors”. 

This may also explain the exodus from Chinese bond products. “Here too we see how the rise in interest rates in the US, with its negative effect on bond prices, actually makes the search for yield away from developed countries less attractive,” he said.

Old and new favourites

As in the active fund space, many popular equity ETFs' popularity diminished in Q1. Flows into environmental, social and governance (ESG) investing ETFs came to €13bn in Q1, less than half of the €27bn that went into them in Q4 2021. Morningstar notes that 30.4 per cent of total money put into ETFs in Europe in Q1 went into ESG funds, down from the 79 per cent record high in Q4 last year. Thematic ETFs, like ESG portfolios and other funds that also tend to come with a quality growth bias, have seen demand shrink amid the disastrous performance of recent months. Flows into these types of funds amounted to €0.6bn in Q1 2022, down from €2.1bn in the previous quarter. Morningstar observes that this was the first quarter since 2019 during which thematic ETFs failed to attract at least €1bn of net inflows.

That’s not to say that all such as ETFs have been left out in the cold. With Russia’s invasion of Ukraine putting a spotlight on the need for renewables, the sometimes troubled iShares Global Clean Energy UCITS ETF (INRG), a poster child for thematic funds, took in €459mn during Q1. The iShares Agribusiness UCITS ETF (SPAG) took in €418mn, and iShares Digital Security UCITS ETF (SHLG) and L&G Cyber Security UCITS ETF (ISPY) both took in more than €200mn in Q1. As we recently noted ('When thematic funds diverge', IC, 1 April 2022), there have been interesting performance differentials between the two in recent months, with iShares Digital Security UCITS ETF falling 8 per cent during Q1 and iShares Digital Security UCITS ETF ending the quarter relatively flat.

Investors have also rushed into gold funds and broader commodity plays, with gold exchange traded products offered by Invesco and iShares taking in almost €5bn between them.

They also favoured value-style investing equity ETFs, with the iShares Edge MSCI USA Value Factor UCITS ETF (IUVF) and its MSCI World equivalent each taking in around €1bn. They also backed some energy and financials sector funds.

Dividend funds proved popular, with the Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL) taking in €507mn and the SPDR S&P US Dividend Aristocrats UCITS ETF (USDV) taking in nearly €400mn. Equity income funds have generally held up well so far in 2022 across different regions, in some cases because their requirement for yield leads them into more cyclical sectors such as financials, which have performed well.

Although chasing yield alone can incur risks, neither of the dividend funds mentioned appear to take a gung ho approach. Vanguard FTSE All-World High Dividend Yield UCITS ETF seeks stocks with a higher than average yield, and excludes real estate investment trusts and non-yielding stocks. It recently had 45 per cent of its assets in North America, with its biggest sector allocation, financials, making up around a quarter of its assets. The dividend aristocrats range, meanwhile, is viewed by some as having a relatively defensive approach, thanks to its focus on companies with a good track record of paying dividends rather than those with the highest yields.

When it comes to new launches, trends such as cryptocurrency-related and ESG funds have continued. Some thematic offerings have also come to market, including the Rize Pet Care UCITS ETF (PAWZ) and the Rize Emerging Market Internet and Ecommerce UCITS ETF (EMRP), which launched in late March.