Surfing the Wave: Active ETF Flows Shine in a Buoyant Summer for Investments

Introduction

While the stock market experienced fluctuations during the third quarter (Q3), Exchange-Traded Funds (ETFs) continued to make waves with a robust $107 billion in net quarterly flows. This impressive figure nearly matched Q2’s performance, signifying a strong rebound after a slow start to the year. These steady flows have positioned ETFs to potentially yield significant annual returns, with Year-to-Date (YTD) net flows standing at $328 billion. In this blog post, we will delve into the most notable trends in ETF flows during the summer and explore how active ETFs are making a significant impact on the investment landscape.

Active ETFs Take Center Stage

One of the standout trends in ETF flows during Q3 is the remarkable momentum behind actively managed ETFs. These are ETFs designed to outperform a benchmark index, and they have gathered a staggering $82 billion, accounting for 25% of total net flows for the year—an all-time annual record for this category. During Q3 alone, active ETFs accumulated $31 billion, comprising 29% of the overall Q3 ETF flows.

Despite this impressive growth, active ETFs still represent just 6% of total ETF assets under management, amounting to $439 billion. This suggests that there is ample room for active ETFs to expand their presence in the market. To meet the growing demand for these funds, approximately 80% of the 146 new ETFs launched in Q3 were actively managed.

The surge in active ETFs has not only been a boon for this specific category but has also contributed to increased flows into equity ETFs, which are predominantly composed of stock ETFs. After a record-setting Q4 in 2022, equity ETF flows saw a decline in Q1 2023. However, they have shown resilience over the past six months, hinting at the impact of active management on investor sentiment.

Sector-Wise Insights

Among the 11 stock market sectors, Q3 saw net flows for cyclical-sector-focused ETFs generally outperforming defensive sector ETFs. The surge in oil prices over the summer translated into increased demand for energy sector ETFs. Interestingly, energy ETFs experienced inflows after sizable outflows in four of the last five quarters, with a net inflow of $2 billion. The consumer discretionary sector also attracted $2 billion in inflows, while the technology sector garnered $2 billion. In contrast, health care (-$3 billion), financials (-$2 billion), and consumer staples (-$2 billion) led in outflows.

Bond ETF Flows in Decline

A recurring trend over multiple quarters has been the steady decrease in demand for fixed income ETFs, which primarily consist of bond ETFs. While bond ETF flows remain positive, they have declined for three consecutive quarters, reaching a multi-year low in Q3.

Government bond ETFs have been the dominant force in this category’s flows year-to-date. Fluctuations in corporate bond ETF flows, with outflows in Q1 and Q3 and healthy inflows in Q2, have resulted in subdued flows for this category thus far in the year.

Investing in ETFs

If you’re considering entering the world of ETF investing, it’s crucial to focus on your specific objectives and risk constraints rather than blindly following trends in ETF flows. One valuable tool to assist you in your ETF selection process is Fidelity’s ETF Screener. This tool allows you to filter ETFs based on various characteristics, such as the fund’s objectives, fundamentals, technicals, performance, volatility, trading characteristics, tax considerations, and analyst ratings. Using such tools can help you make informed investment decisions aligned with your financial goals.

Conclusion

Q3 has been marked by resilient ETF flows, with a notable rise in active ETFs, outperforming stocks in terms of net inflows. As the investment landscape continues to evolve, it is essential for investors to remain diligent in their research and select ETFs that align with their specific financial objectives and risk tolerance. While ETF flows can offer valuable insights into market sentiment, individual investors must base their decisions on a well-thought-out investment strategy. Whether you choose active or passive management, ETFs offer a diverse array of investment options to suit a wide range of investment goals.