Flow & Tell with iShares | January 2024 ETF Flows

Traditional New Year’s Resolutions have been swapped for pithy ‘Ins & Outs’ listicles, and January’s iteration of Flow & Tell aims to keep up with the fad, too. We wrapped 2023 on the heels of one of the sharpest rallies in equity market history, lifting the market to new all-time highs on a narrow concentration of leaders. Still, a slew of equity earnings, paired with rate cut repricing, have subdued investor sentiment since.

Here’s what that meant for the month’s flows trends, in the trendiest format:

• IN: Increased use of active funds, particularly within model portfolios.
• IN: The arrival of spot Bitcoin ETFs in a landmark moment for the crypto industry.
• OUT (for now): Small cap funds, reversing from December highs into negative territory as optimistic investor positioning unwound.

Heightened Active-ity

The days where ETFs were synonymous with passive index funds may soon be coming to an end. Although representing less than 7% of total ETF AUM, active ETFs saw nearly $20bn of inflows in January.¹ That’s nearly the same as the $23bn in total inflows for index ETFs at large. In other words, last year’s trend looks to only be accelerating.

Helping to fuel the adoption of active ETFs has been their inclusion in “model portfolios” — which use ETFs as building blocks to create diversified portfolios for a range of client types and outcomes. Recently, both DYNF (BlackRock U.S. Equity Factor Rotation ETF) and BINC (BlackRock Flexible Income ETF) were added to a model portfolio, contributing to inflows of $2.9bn and $867mn, respectively, in January.²

The use case for active ETFs within model portfolios is two-fold: (i) take advantage of tactical opportunities without the need for the entire model portfolio to rebalance; (ii) utilize expertise in sub-asset classes where active managers may have an edge. 

For instance, a systematic factor rotation strategy, like DYNF, can change factor weights without the need for the model portfolio itself to trade or rebalance. An active fixed income ETF, such as BINC, enables the portfolio to utilize the expertise of an active manager in an attempt to generate additional income.

Bitcoin ETFs: Freshly Minted

January delivered the widely anticipated launch of 11 spot Bitcoin ETFs in a watershed moment for the cryptocurrency industry, kicking off standout trading volumes and flows despite BTC’s price decline since launch date.

IBIT (iShares Bitcoin Trust) crossed the $2bn in AUM threshold last Friday, an accolade earned in just over two weeks since inception – one of the most successful ETF launches in history. Trading volumes also stood out: collectively, the spot Bitcoin ETFs have traded over $1.6bn each day on average since launch, with IBIT capturing ~30% of the average daily share volume.³ Under the hood, the bulk of participation hails from retail investors, with the average IBIT trade size clocking in at just over $5,000.⁴

Small Caps, Large Swings

December’s everything-rally favored the year’s underperformers: small caps caught a bid, eclipsing the gains in the benchmark S&P 500 after spending most of the year lagging by double-digits.⁵ Animal spirits were surprisingly strong, and flows followed suit, with small cap ETFs notching their highest month of inflows in a decade.⁶ Investors entered 2024 with optimistic positioning rooted in a hope for Q1 rate cuts on the horizon.

January’s price action sharply reversed the year-end euphoria, and small caps quickly unwound earlier gains, dipping 4% on the month as rate cuts were repriced. Flows mirrored performance on the way down, too — small cap ETFs reversed into negative territory, shedding $2.3bn in the exposure’s largest month of outflows since April 2022.⁷