Flow & Tell with iShares | ETF Flows and Themes of 2023

Over $8.0 trillion — that’s the number of assets under management in U.S.-listed ETFs, an all-time high for the industry.¹ In four short years (that didn’t feel that way), the U.S. ETF industry doubled its AUM, predominantly powered by equity flows. Although equity ETFs make up the majority of ETF assets, fixed income ETFs saw their largest year of inflows, as more investors migrate to the fund structure for bond exposure.²

Equity ETF flows recorded their third largest year on record, adding over $400bn in net new assets over the course of the year.³ Fixed income ETFs set record inflows, adding over $200bn to the asset class for the fourth straight year in a row.⁴  However, money market funds stole the show with a whopping $1.3tn in net inflows — the single largest year of inflows for the space.⁵

While active funds only account for about 6% of total ETF assets globally,⁶ they punched above their weight in flows, capturing 24% of new money in 2023.⁷ ETF issuers have been keen to get on board, launching more than 350 active funds in 2023 globally, also a record. Even so, the asset weighted average fee across the U.S.-listed ETF industry declined as ETFs maintain their reputation for low-cost vehicle of choice.⁸

The year kicked off with recession predictions preceded by ‘when,’ not ‘if’ as investors braced for the seemingly inevitable hard landing. As a result, flows flocked to benchmark allocations rather than active sectoral bets, highlighting the year’s pervasive lack of conviction. S&P 500-tracking ETFs added $122bn on the year, more than 3.5 times the median annual inflows over the past decade.⁹

Quality emerged as the year’s favored factor as investors added to exposures with strong profitability, low leverage, and low earnings variability. Despite kicking off 2023 in outflow mode, quality factor ETFs reversed into positive territory following the collapse of Silicon Valley Bank, with worries of contagion prompting investors to seek quality characteristics.

Quality enthusiasm was renewed in Q2 on the back of economic concerns (think disappointing PMI figures + debt ceiling debacle + the third, consecutive 25bp hike of the year). May marked the largest month of inflows for quality factor ETFs in the past decade, as institutional model rebalances and retail investors alike added to the exposure.¹⁰

2023 marked the rise of the robots, as generative AI technology went mainstream. The so-called “Magnificent 7” became the blockbuster of the summer (sorry, Barbie!), as the market rallied on low breadth and mega cap growth stocks led the way. Investors clamored for exposure to the theme, adding to semiconductor and AI focused funds as well as large cap tech. Watch for more money in motion in 2024 as we believe this theme is in early innings.

Growth across term maturity ETFs has exploded over the past two years as investors moved to lock in higher yields. Designed to provide the diversification and liquidity of a fund alongside the permanence and definition of a bond, iShares® iBonds® have taken in close to $20bn of assets since the beginning of 2022.¹¹ With individual bonds still a significant portion of the total bond market, term maturity flows see no limit in sight.

Investors fled to U.S. Treasury ETFs in droves amid 2023’s economic uncertainty. Collectively, these funds added more than $100bn in new assets, more than half the total to fixed income ETFs.¹²

Short-term Treasury ETFs saw $22bn of flows in Q1, as investors took advantage of the inverted yield curve to shorten their duration as the Fed continued their hiking cycle. As the year progressed, the tune changed. In Q4, as it became clear that the Fed was likely done hiking, investors piled into long-end Treasury ETFs which saw $14bn of inflows over the quarter.¹³

Japan’s Nikkei 225 Index, the Tokyo Stock Exchange’s benchmark, returned nearly 30% on the year, outstripping the gains for the S&P 500 on the heels of ultra-accommodative monetary policy and shareholder-friendly corporate reforms.¹⁴

The Nikkei 225 Index’s gains marked a local record, clocking highs not reached in over 30 years, and flows followed suit: Japan ETF inflows are on course to log the best year since 2015, adding over $6bn on the year, a sharp unwind from last year’s net outflows.¹⁵

While Emerging Markets weren’t exactly hot this year, a few exposures bucked the trend. EM ex-China focused funds took in nearly $5bn in new assets in 2023 as investors continued to vote with their feet in preferring a more modular approach to the development block. The rewiring of global supply chains combined with favorable demographics led investors to prefer allocations to single countries such as India and Mexico, which topped the charts in 2023 flows.¹⁶