Demand for ‘risk-on’ assets drives boom in ETF flows

Global net inflows triple month-on-month as upbeat mood spreads across fixed income, emerging markets, and tech sector

Demand for ‘risk-on’ assets drives boom in ETF flows

Following a year of excruciating losses, exchange traded fund purchasers shifted from bearish to optimistic in October, indicating some investors thought the global equities and bond markets may be close to their low point.

According to BlackRock data, net inflows into ETFs soared to US$111.5 billion globally, more than tripling from September and reaching their biggest level since March, reported the Financial Times.

The surge in demand for a variety of "risk-on" assets, including high-yield and long-term bonds, emerging market equities, and technology stocks, was what drove the strong headline flows, which contributed to the positive mood.

In September, when investors battened down the hatches, a majority of the modest ETF inflows were routed into haven US Treasury bond funds. Just 22% of fixed-income ETF flows went to corporate bond ETFs, in stark contrast to October when corporates accounted for nearly half.

In a dramatic contrast to the US$19.6 billion that flowed out from the high-yield bond market between January and September, high-yield bonds brought in US$7.8 billion, the biggest since April 2020.

Long-term bond funds, with exposures of 10 years or more, also saw inflows spike to US$6.7 billion – the third-largest record in history.

“High-yield is already implying a particularly elevated default rate that we don’t expect to realise unless there is a systemic-level recession,” Karim Chedid, head of investment strategy for BlackRock’s iShares ETF arm in the Emea region, told the Times. “The recession we are expecting for 2023 for the US wouldn’t trigger that big a pick-up in defaults.”

He also pointed to the US$7.3 billion in total flows into developing market stocks that occurred in October.

Furthermore, Chedid suggested that emerging markets were "flying under the radar" and "could be well positioned as the dollar starts to hit a peak" as this was the 16th consecutive month of inflows and brought the sector's year-to-date total to US$81.1 billion, on track to surpass last year's full-year record of US$90.6 billion.

Most EM buying seems to be within the region, though, with ETFs listed in the Asia-Pacific area accounting for US$5.1 billion of October's US$7.3 billion total. A large portion of the Apac demand may be the result of purchases made in China, where investors still have few choices for accessing foreign markets.

Year-to-date flows into Emea-listed EM stock funds have reached US$11.7 billion, and are on course to surpass 2021's US$12.3 billion.

This is in stark contrast to the lack of interest in ETFs tracking Europe's own equity markets, which have experienced US$15 billion in net withdrawals so far this year.