The review of ETP flows in 2021 from iShares by BlackRock reports that global flows into ETPs hit new heights in 2021, with USD1.3 trillion of inflows – 1.7x the previous record set in 2020 (USD768.1 billion), and on par with total inflows across 2019 and 2020 combined.
Equity flows dominated in 2021, with a record USD982.7 billion of inflows, vs. USD423.6 billion in 2020. Fixed income flows inched higher for a third consecutive year to set a fresh record, with USD273.4 billion added. Commodity ETPs registered a first year of outflows since 2018, with USD2.8 billion of selling, including USD9.9 billion out of gold ETPs – the largest outflows from the precious metal since 2013.
Key themes in 2021:
Equities lead the way
• 2021 was a standout year for equity ETPs, with USD982.7 billion of inflows, including four of the top five equity inflow months on record. However, flow levels proved far from uniform throughout the year, with large inflow months often followed by a significant drop in flows in the following month.
• US-listed flows accounted for the majority of equity buying (USD724.4 billion), but 2021 was also a record year for EMEA-listed equity ETPs, with USD137.3 billion added. EMEA-listed equity flow trends were similar to those seen at the global level, with US exposures leading (USD47.8 billion), and YoY flows into European equities marginally increasing. In a sign of international investors driving demand for European equities, flows into US-listed European equity ETPs outpaced flows into EMEA-listed peers, at USD16.2 billion vs. USD10.3 billion.
• The overall pick-up in equity ETP flows was driven by increased appetite for US equities, with USD568.3 billion of inflows in 2021 – including a record USD83.5 billion added in December. Emerging market (EM) equities were the next most popular exposure, with inflows hitting a record USD82.2 billion in 2021, surpassing the previous record set in 2018. In contrast to 2018, when flows overwhelmingly went into broad EM exposures, buying was relatively evenly split between broad and single country ETPs in 2021.
Rotation in fixed income
• In contrast to the bumper equity flows, the pickup in fixed income ETP buying was relatively muted in 2021, although flows into the asset class still hit new highs (USD273.4 billion vs. USD267.5 billion in 2020). Below the surface, there was a rotation in leadership in fixed income flows in 2021. US-listed flows increased by USD1 billion to a record USD202.3 billion, while EMEA-listed flows increased to USD46.7 billion, albeit below the record USD63.6 billion of inflows in 2019.
• Rates and inflation-linked bond ETPs led the way in fixed income flows in 2021, with USD56.9 billion into the former (up from USD31.3 billion in 2020) and a record USD47.2 billion into the latter. Allocations to credit dropped off from 2020’s elevated levels, with investment grade (IG) flows falling from USD64.4 billion in 2020 to USD25.2 billion in 2021, and high yield (HY) flows falling from USD24.2 billion in 2020 to USD6.1 billion in 2021. Emerging market debt (EMD) bucked the negative trend within spread assets to post a YoY increase, with USD16.5 billion of inflows, up from USD15.1 billion in 2020.
• Delving deeper into credit flows, the overall drop in IG ETP buying was driven by a fall in demand for US-focused exposures. On the other hand, inflows into European-focused IG ETPs rose to a record USD3.5 billion in 2021, while flows into global IG exposures also picked up. In HY flows, European-focused exposures notched up a second consecutive year of outflows, while US-focused HY flows remained positive, albeit at a lower level than in 2020.
Inflation on the mind
• With increased market focus on inflation, investors allocated to inflation-sensitive ETPs across 2021. Inflation-linked bond ETPs recorded USD47.2 billion of inflows – in line with total inflows across 2015- 2020 combined. Of 2021’s total, USD43.2 billion was allocated to US-focused ETPs, although this was also a record year for flows into eurozone linkers (USD2.1 billion), and global linkers (USD1.6 billion).
• Infrastructure ETPs also had a record 2021 for flows, with USD9.4 billion added – almost 3x the previous year’s total. In sectors, energy notched up a record year of inflows, with USD19.4 billion added, while financials – which some see as well-positioned for a rising inflation environment – registered a record USD45.4 billion of inflows.
• However, gold – which is often perceived as a more traditional inflation hedge – had a torrid year amid the general risk-on environment, with USD9.9 billion of outflows vs. USD45.0 billion of inflows in 2020. This was the first year of outflows from gold ETPs since 2015, with selling across listing regions.
Shifting trends in sectors and factors
• Sector flow trends shifted over the course of 2021: cyclically-tilted and manufacturing-tilted sectors led the way in Q1, but momentum petered out as the restart peaked and investors tilted to quality sectors towards the end of 2021. This left tech as the most popular sector for the second year in a row, with a record USD49.8 billion of inflows, while healthcare also notched up a record USD15.9 billion.
• The cyclical side of the barbell didn’t completely unwind though, with the change in sector leadership representing a tilt to quality rather than a rotation. As a result, financials ended 2021 as the second most popular sector, recording USD45.4 billion of inflows after being neck and neck with tech for most of the year. Energy and materials flows also remained solid. Investors started to sell industrials ETPs, however, with USD0.5 billion of outflows for the year, after USD9.4 billion was added in 2020.
• The tilt towards quality was also prevalent in factor trends, with buying of quality factor ETPs in Q4 bringing net inflows to USD7.6 billion for the year. Value ETPs recorded USD2.7 billion of selling in December – their largest outflow month on record – yet value remained the most popular factor in 2021, with USD21.6 billion of inflows. Investors sold minimum volatility ETPs for a second consecutive year, with USD14.9 billion of outflows in 2021, after USD16.4 billion of selling in 2020.
A record year for sustainable
• 2021 was another record year for sustainable flows, with combined inflows across US and EMEA-listed ETPs reaching USD135.4 billion – a 62 per cent increase from 2020 and more than 4x the sustainable flows of 2019. Notably, over 70 per cent of 2021’s sustainable flows were generated in EMEA.
• The record-breaking flows of Q4 2020 continued through the start of 2021 with US and EMEA-listed ETPs seeing over USD46 billion of inflows in Q1 2021. January and February in particular were record months for EMEA products, with USD10.3 billion and USD14.7 billion in net inflows, respectively. Sustainable flows in the US peaked at USD7 billion in January, and remained fairly consistent for the rest of the year, with an average of USD3 billion of net inflows per month, led by ESG-optimised and environment-based strategies.
• In EMEA, flows tempered slightly in Q2, with an average of c.USD5 billion per month from April to June. Momentum picked up significantly in July, with USD9 billion of net inflows for the month. Flows increased even more in Q4, finishing the year USD12 billion of inflows in December alone. EMEA flows were consistently led by ESG best-in-class strategies throughout the year, followed by ESG optimised / tilt strategies.