The third quarter of 2023 saw $111 billion of cash flows into US-domiciled exchange-traded funds with equity ETFs leading investor interest with almost $80 billion even as domestic equities fell 3.3%.
But according to the latest ETF Perspectives report from Vanguard, ETF assets declined overall by 2.2% to $7.2 trillion as inflows were offset to market depreciation driven by investors’ concerns that interest rates will remain higher for longer, even if the Fed has concluded its current cycle of hikes.
Large-cap equities, specifically technology stocks, were in focus for ETF investors who were likely chasing the promise of higher returns as these equities rebounded from a lull in 2022. U.S. equities accounted for $66.6 billion of the total inflows with $9.7 billion for international.
However, both U.S. and international equities lost ground by the end of the third quarter of 2023 amid concerns over liquidity, rates, and recession.
Year to date, $57.7 billion of net new flows have gone into S&P 500 ETFs, or 30% of net new equity ETF purchases.
Nontraditional equity ETFs attracted $53 billion, helped by buy-write or "covered call" strategies, but if income is the goal, Vanguard says that there are more tax-efficient and lower-cost options readily available, notably fixed income and dividend-focused ETFs.
For bond ETFs, investors opted for a barbell strategy and took advantage of rising yields at the short end of the curve. They invested almost $14 billion in short-term investment grade bond ETFs while $8 billion flowed into long-term Treasury ETFs. However, high yield strategies, that have been favored by some investors, can be reconsidered now that rates are higher across the yield curve.
Fixed income attracted $34 billion in the third quarter; however, investment grade corporate credit flows were slashed in half as investors sought relatively attractive yields on the front end of the yield curve while keeping duration risk in check.
The Vanguard report also shows that actively managed ETFs are growing in popularity but account for just 6.2% of industry assets.
Year-to-date, actively managed ETFs posted flows of $79 billion but 37% of this was into just 10 of the 1,215 active ETFs available.
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