Flow & Tell with iShares | May 2024 ETF Flows

April showers (in the form of broad risk asset losses) indeed spurred May flowers, and not just at the Met Gala’s ‘Garden of Time’ black-tie extravaganza. U.S. equity markets shook off April’s negative performance to register broad gains, with all eleven GICS sectors ending higher. The domestic sentiment reversal followed a drastic swing already playing out overseas — the Hang Seng Index extended its four-month winning streak in May after three consecutive quarters of losses.

Expectations for more policy support from Beijing for the badly beaten property sector fueled recent optimism, but the rally may be running out of steam — May’s monthly Hang Seng gains declined from April levels, and the CSI 300 dipped negative in May, its first monthly loss since January. Still, flows chased performance, and May marked the largest month of inflows into China ETFs in 1.5 years, after largely negative monthly averages since 2022.¹

The surge in investor enthusiasm for artificial intelligence has spilled over to the utilities sector, which clocked its best month since November 2022. BlackRock’s fundamental equities team estimates that the energy demanded to train and run AI models could top 1000 terawatt hours of incremental demand by 2030 (a quarter of the U.S. yearly electricity consumption!) — a forecast that has pulled utilities 15% higher year-to-date.² Adding to the constructive outlook for the sector are benign valuations: unlike most of the S&P 500, multiples for the sector are right in line with their historic average. Meanwhile, the tech sector has been trading around 31x P/E, much higher than its 10-year average of 23x.³

Still, despite the AI buzz, ETF flows into utilities are relatively dim. As markets priced in less interest rate cuts for 2024, investor optimism for the rate-sensitive sector has been dwindled. Utility ETFs have shed over $1.6bn in net assets so far this year.⁴ While these outflows come on the heels of a deeply negative 2023, positive returns in the underlying stocks paint a story of divergence — sentiment belies sector strength.

After starting the year with a meaningful rally and strong inflows, Japanese ETFs are in outflow mode. Since the beginning of 2023, Japanese equities have gained as much as 52% on the back of continued investor interest due to the return of economic growth and supportive governance policies, resulting in a steady stream of monthly inflows into Japan ETFs.⁵

More recently, however, investors have opted to take profit on double-digit gains. For the first time this year, Japanese ETFs have lost assets. Outflows have been led by non-currency hedged funds, which have sharply lagged behind their currency hedged peers this year as the yen reached decades-low levels compared to the USD.⁶

Un-hedged Japan ETFs lost $315mn in May, marking a turn from the $3bn of inflows added between January and April. Notably, hedged Japanese ETFs remained asset gatherers in May, adding $253mn⁷ as investors take a more nuanced view on Japan exposure. We remain constructive on Japan over a medium term horizon.