In this article I review the total size and flows of U.S. ETFs and Mutual Funds through the third quarter of 2020, discuss important trends among asset classes and issuers, and provide a deeper dive into the Fixed Income ETF sector.
ETF & Mutual Fund Market Overview: At the end of September, the total US ETF market reported assets of $4.7 trillion, comprised of over 2300 funds. The ETF sector contains 73% equity funds, 21% fixed income, and 6% other. In comparison, mutual fundsin the U.S. totaled over $18 trillion in assets, with an additional $4.5 trillion in money market funds. Mutual funds lean similarly toward equities.
ETF & Mutual Fund Flows Overview: Through the end of September, total ETFs in the U.S. reported near-record inflows of over $300 billion. Putting this into context, the entire ETF space had AUM under $1 trillion less than ten years ago. Bond ETFs pulled in nearly 50% of all flows, continuing their strong 2019 trend, while equity funds comprised 37% of flows. In contrast, mutual funds reported outflows of nearly $400 billion through late September, with heavy redemptions in equities buoyed somewhat by ~ $80 billion in fixed income inflows. Money market mutual funds have seen nearly $900 billion in inflows this year.
At nearly $100 billion in total flows, the third quarter was down from an even stronger Q2 and capped off the second best ytd ETF flow on record.
ETF Flows by Issuer: While the battle rages on for flows among the Big Three (“B3”), there was expansion in market breadth this year, with the B3 capturing 71% of flows vs. their 80% asset share. Vanguard has been the standout leader among the B3, capturing 44% of all ETF flows, compared with 20% for iShares and 7% for SPDRs. Among the top 25 ETF issuers, a number of managers gained market share through flows, including: ProShares, J.P. Morgan, Direxion, and Ark. Out of over 145 issuers, the top ten comprise 95% of assets and 87% of 2020’s fund flows.
A few fund details to illuminate the issuer trends noted above: Vanguard saw strong growth across VTI and their bond suite. SPDRs gained big in GLD & BIL but lost more in SPY. iShares saw strong flows into IAU and the bond suite, led by LQD, but saw large outflows across their international equity funds. ARKK was a big winner, with additional gains in JPST and directional strategies from ProShares and Direxion (SH, TQQQ, SQQQ, and SPXS.)
The Largest ETFs, the Biggest Flows: While the largest 10 funds captured their proportional share of inflows (28%), there was some clear shifts in leadership, as SPY lost share, GLD shot up, and the big bond funds (AGG & BND) moved up the ranks.
Quick comment on Equity Sectors: No big surprises among winners and losers in the equity ETF categories, as large-cap led the pack and gained share, with foreign large cap and tech also gaining share, Meanwhile, many of the higher beta and foreign sectors saw steep outflows. I was surprised to see energy as a top inflow sector.
Fixed Income Focus: My readers know I love bonds, indexing, and ETFs (better all in one package!) so let’s dig into the some of the details. Rounding up, Fixed Income ETFs reached a milestone $1 trillion total AUM last week, with big gains by corporate bonds in recent quarters – boosted by Fed actions, with Vanguard gaining share. The only major category that reporting net outflows was EM bonds. Not much movement in market breadth in fixed income, as the B3 issuers maintained nearly 85% share, which was a result of the biggest funds getting even bigger. However, there were some solid gains by First Trust, J.P. Morgan, and Franklin Templeton.
Specific Bond Funds: As noted above, the big corporate ETFs such as LQD and VCIT saw huge AUM gains on the back of Fed support, while treasury funds ended up reporting losses after big gains in the early part of the crisis. Floating rate bonds did not fare well, with a number of FRN and Loan funds in the steep outflow category. No matter how you cut the data, the biggest funds gained market share; for example, the top 10 funds, which comprise 27% of AUM, took in nearly 40% of all bond ETF inflows this year.
As I mentioned in my Q2 flow round-up, the timing of bond flows has been interesting this year, with a quick switch from risk-off to risk-on, as shown below in the weekly flows of BIL and HYG, as proxies for ‘fear’ and ‘greed’, respectively.
A Few Observations on Bonds and ETFs in 2020: (in no particular order)
- Funds classified as ESG-focused have taken in nearly $20 bn in assets this year.
- Despite the public drubbing, energy sector ETFs have gained nearly $5 bn in assets.
- Since being approved in December of 2019, semi-transparent ETFs made their debut this year, and have gathered nearly $600 million in assets. (Link)
- We had lots of fund watching the gyration of Fixed Income premium / discounts in March (Post1,Post2 R. Browne Discussion)
- In a highly unusual move, a number of Index Providers delayed month-end rebalancing for March. (Link)
- BNY Mellon launched the first zero-fee bond ETF (Link)
- The Dec 2019 passage of the “ETF Rule” (Rule 6c-11) gives issuers 12 months to comply, greatly speeds up time-to-market, removes the differing requirements for “active” vs. “passive” ETFs, and evens the playing field in regards to custom baskets.
- With the Fed explicitly supporting corporate credit and bond ETFs (Link), 2020 has been a record year for Investment Grade new issuance, with over $1.4 T issued so far this year.
- While major equity benchmarks are in positive territory ytd, Investment Grade spreads remain +40 bps wider, while High Yield bonds are +185 bps wider on average.
- As of the publishing date of this article, the US 30yr bond yields 1.5%.
“Let’s be careful out there” – Sgt. Esterhaus, Hill Street Blues.
Data Sources: www.etfdb.com, etflogic.io; ici.org, citi.
Elya Schwartzman is the founder and president of ESIC LLC, an independent advisory firm specializing in ETFs, indexing, fixed income portfolio management, and investment infrastructure and technology. ESIC also provides independent research on these topics. Over the past 15 years, Mr. Schwartzman has played a key role in the growth of the ETF industry, having managed teams, portfolios, and investment process initiatives for BlackRock and SSGA. www.esicllc.com
Disclaimers: ESIC seeks to, and may have in the past, currently, or in the future, provide paid advisory services to companies in the ETF ecosystem, including but not limited to issuers, index providers, analytics and data vendors, and market makers. Any views expressed are solely of the author and should not be construed as investment advice.