2022 Bear Market Will Accelerate ‘Significant Shift from Mutual Funds to ETFs’

This year’s bear market hasn’t stopped capital inflows into exchange-traded funds (ETFs) from rising to historic highs, even if inflows have slowed since 2021.

As of the end of November, U.S.-listed ETFs were attracting $568 billion in 2022, according to a report by State Street Global Advisors, with annual inflows of $622 billion based on average December flows over the past decade. Expected. 2021 will be the first example, and it will be his second time in a calendar year that flow has surpassed his $600 billion, the report said.

Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, said in a phone interview, “The bear market is accelerating a massive shift from mutual funds to ETFs.

For many investors, this means that they are either “losing” or have returned “satisfactorily” if hit by a capital gains tax when switching to ETFs, which tend to be cheaper and more costly. Its small size makes it a “catalyst for action”. Bartolini explained that they are more tax efficient than mutual funds.

Bartolini said the ETF industry had about $6.6 trillion in assets under management at the end of November. Last year he was down from $7.3 trillion, but still above recent years. For example, his U.S.-listed ETF assets surged from his $3.4 trillion in 2017, and this year he continues to grow from his $5.5 trillion in 2020, according to Bartolini. email provided by his data.

The pace of monthly ETF inflows has picked up recently. His $174 billion inflow seen in the three months to November ranks “historically in the 91st percentile,” according to a State Street report, making it the last top 20 in such a rolling span. Ranked.

Bartolini, who wrote the State Street report, wrote that fixed income ETFs are “one of the big drivers of this accelerating pace.” In a call, he said investors were showing interest in high-yield bonds as a “giveback” of assets from the past two months.

But he also said that fears of a looming recession will make it difficult to get high-yield, or so-called junk, hype in 2023. High yield bonds carry a higher risk of default than investment grade bonds. Bartolini said in 2023 he prefers short-term investment-grade corporate bonds with a duration of one to three years and a yield of about 5.5%.

Government debt was the largest draw in bond flows in the three months to November, according to a State Street report. Short-term bonds attracted almost three-quarters of the capital flowing into government debt over that period.

read: BlackRock sees ‘tremendous’ market opportunity for ETF investors in 2023 after damage to equities, bonds

That said, equity ETFs accounted for the majority of inflows through November, attracting more than double the assets that flow into bonds, according to State Street. Commodity ETFs, meanwhile, have been hit by outflows since the beginning of the year, the report shows.

The stock market is “defensively biased,” Bartolini wrote.

State Street last month found health care and consumer goods to be the “primary areas of interest” for the defensive sector. The report shows that ETFs focused on these two areas saw by far the largest sector inflows in November.

Meanwhile, dividend funds continued to attract investors last month, with ETFs focused on dividend-paying stocks drawing inflows for the 27th straight month, according to the report.

“Dividend strategies have a unique combination of value and quality,” Bartolini said in a phone interview, which he said could work well in an environment where corporate earnings are a concern.

But dividend stocks aren’t “100% defensive,” he said. “There is a fair amount of cyclical exposure,” he added, noting that the strategy could also help “upwards from cyclical surprises.”

Shares of iShares Select Dividend ETF DVY
By Wednesday, the stock had fallen just 0.5% for a total return of 2.1%, according to FactSet data. In contrast, the SPDR S&P 500 ETF SPY
Trusts declined 16.3% over the same period on a total return basis.

Among equities, Bartolini said ETFs focused on U.S. stocks attracted the most investor interest this year, but State Street has recently seen demand in other regions.

“Investors may have started looking abroad” in November amid concerns that the U.S. market appears “perfectly priced” from a valuation standpoint, he said by phone. rice field.

Shares of Xtrackers Harvest CSI 300 China A-Shares ETF ASHR
The iShares MSCI Emerging Markets ETF EEM plunged about 26% through Wednesday this year.
It fell almost 21%, as data from FactSet shows. iShares MSCI EAFE ETF EFA,
The index, which tracks developed market indices in Europe, Australia and the Far East, has fallen about 15% over the same period.

Bartolini said he expects about $500 billion to $600 billion to flow into U.S.-listed ETFs next year despite looming recession fears.

As usual, according to FactSet data, here are the best and worst performing ETFs from the past week through Wednesday.

good stuff…

…and the bad

new ETFs

• Tidal Financial Group today announced the launch of the Senior Secured Credit Opportunities ETF SECD.,
  An actively managed fund that invests in senior secured loans and secured bonds. He Tidal, an ETF investment and technology company, said the new fund is managed by Gateway Credit Partners.

• Dimensional Fund Advisors announced the listing of the Dimensional US Large Cap Value ETF DFLV on December 7th.
  Dimensional Global Real Estate ETF DFGR
  at NYSE Arca.

weekly ETF reading