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While aggregate flows to equity ETFs slowed to $598bn from $1tn in 2021, some defensive sectors shattered their previous bests in 2022, such as utilities with a total of $6bn © Bloomberg

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Last year may have been one of the worst years ever for global markets, but sections of the exchange traded fund industry stormed to new records in a generally strong year that underlined the vehicles’ accelerating growth.

ETFs attracted net inflows of $867bn globally during the year, the second-highest on record after 2021’s $1.29tn peak, according to data from BlackRock, despite the market crash.

But a number of asset classes went one better and chalked up their highest ever flows despite the headwinds. Government bond ETFs saw net inflows of $181bn, more than in the three previous years combined, BlackRock said, with records broken across the curve, in short, intermediate, long and blended maturity funds.

And while aggregate flows to equity ETFs slowed to $598bn from $1tn in 2021, emerging market equities set a fresh record, sucking in $110bn. Some defensive sectors also shattered their previous bests in 2022, such as healthcare ($20bn) and utilities ($6bn).

Not everything came up roses, though. Inflation-linked bonds (-$14.6bn) and emerging market debt (-$9.2bn) saw record outflows, as did equity ETFs focused on the financial sector (-$16bn), a year after registering their strongest-ever inflows of $47.2bn.

ETFs targeting European equity markets suffered their third-largest outflow on record, of $16.8bn.

“Investors have been turning away from broad European equities as the region was impacted by war in Ukraine, high inflation and stronger monetary policy tightening than initially expected,” said Rory Tobin, head of the Global SPDR ETF business.

More broadly, though, global investors continued to put their faith in ETFs, despite their existing holdings drowning in a sea of red ink.

“As a global ETF industry, despite how difficult 2022 was for markets more generally, with double-digit declines in stocks and bonds, it has been a good year,” said Karim Chedid, head of investment strategy for BlackRock’s iShares arm in the Emea region.

“It was the second-largest year [for flows] on record, but there were very different conditions for the two years,” Chedid added. “In 2021 equities were going up and we had a positive environment for risk. 2022 was a negative environment but investors were still using ETFs to make asset allocation moves.”

Scott Chronert, global head of ETF research at Citi, said full-year flows of $589bn into US-listed vehicles “strikes us as impressive, even though it falls short of prior records, given weak global equity returns coupled with rising rates”.

The resilience points to the strength of the ongoing “structural bid” for ETFs with investors increasingly adopting them at the expense of mutual funds, particularly in the US, by far the largest investment market.

According to data from the Investment Company Institute, a trade body, as of December 28, ETFs had seen net inflows of $611bn in the US during 2022, while long-term mutual funds (ie stripping out cash-like money market funds) suffered net outflows of $1.1tn.

“While ETFs have been around for nearly three decades, it feels as though the industry is still accelerating,” said Nate Geraci, president of the ETF Store, an investment adviser, who forecast that inflows in the US alone this year would top $1tn.

“While it’s been going on for a while, I think we’ll look back on 2022 as the year mutual funds formally passed the baton to ETFs. The mutual fund is now dying as an investment vehicle. The time of the ETF has arrived.”

Line chart of Cumulative net ETF flows ($bn) showing Corporate bonds bounce back

Overall, fixed income ETFs proved particularly resilient last year, with global net inflows of $266bn broadly in line with $280bn in 2021 and $269bn in 2020.

There was a dramatic shift beneath the surface, however. Government bonds — in particular US Treasuries — accounted for 68 per cent of fixed income flows, more than three times the proportion in 2021.

Chedid believed fixed income inflows in the first half of 2022 were largely a safe haven trade “as investors flocked to dollar assets, especially Treasuries”.

Column chart of Annual flows into regional equity ETFs ($bn) showing Emerging market resilience

However, buying in the second half of the year was motivated by rising yields, with negative-yielding bonds now, finally, consigned to history.

“Even though on a total return basis 2022 was a very difficult year for fixed income we have seen a surge in buying of exposures that weren’t yielding before but are now,” Chedid said.

The resultant re-risking saw demand spread to investment grade corporate bonds by the third quarter of the year and high-yield ones by Q4 — averting what had looked set to be a record outflow from the latter category.

Line chart of Cumulative net flows into select sector ETFs ($bn), 2020- 2022 showing Tectonic shift

On the equity front, the resilience of emerging markets may seem surprising, given that tightening US monetary policy and a rising dollar are normally a toxic combination for EMs.

However, Chedid said many EMs had fortified their markets by embarking on rate-rise cycles before the Federal Reserve and, as 2022 progressed, “EM looked to be in a slightly different cycle to developed market monetary and growth cycles”.

Captive Chinese buying may have accounted for half the inflows to EM, though, with Asia-Pacific listed ETFs pumping a net $52bn into the Chinese equity market.

Line chart of Cumulative net flows into sustainable ETFs by listing region ($bn), 2022 showing Oceanic divide

At a sector level technology funds topped the leaderboard, despite a painful sell-off, raking in $25.6bn.

A transatlantic divide has opened up in attitudes towards “sustainable” investing, though. Net flows into Emea-listed sustainable ETFs slowed from $100bn to $54bn, in line with the broader easing of inflows into equity funds. However, amid a backlash against some tenets of “sustainability” in the US, inflows there crashed from $39bn to just $5bn.

Chedid believed poor performance played a part in the waning enthusiasm stateside, but added: “The trend is much stronger in Europe. It never picked up to the same extent in the US anyway. Regulations are different. In Europe the drivers are stronger and more persistent.”

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