US equities account for half of hefty global ETF flows in May

The all-powerful US equity market grabbed the lion’s share of a solid $116.1bn of global net inflows to exchange traded funds in May, as the industry bounced back from April’s “muted” $69.6bn of buying.

However, amid signs that the tectonic plates of monetary policy and market dynamics were slowly shifting, there were noteworthy inflows to some comparatively niche areas such as European equities, utility stocks and high-yield bonds.

High-yield bond ETFs pulled in a net $5.4bn of new money in May, according to data from BlackRock, their strongest month since November and an emphatic reversal of the $2.2bn they bled in April.

Flows to junk bond ETFs even outstripped the $5.1bn sucked up by investment grade bond funds, something that had only previously occurred once in the prior 12 months.

“It’s rare for high yield to be a bigger portion than investment grade,” said Karim Chedid, head of investment strategy for iShares in the Emea region at BlackRock.

The majority of this money was directed to US high-yield, but Chedid noted that the European market had seen steady buying since November, and believed this was now where the real opportunity laid.

“We see relative value in high yield on the European side,” he said, with yields of 7 per cent plus. “The spreads are trading cheaper [than in the US] even though the quality of the universe is higher.”

Chedid was also cheered by “the green shoots that we are seeing in the European economy”, given that “high-yield tends to be linked closely to growth”.

That said, not all fixed income investors were as gung-ho to jump into the more speculative end of the bond universe.

Safety-first short-term government bond ETFs, defined as those of up to three-year tenor, soaked up $4.2bn of net inflows in May, surpassing the $3.1bn witnessed in April, which itself came after $15.2bn of outflows between November 2023 and March.

Equities were also in demand, with global ETF flows rising from $40.9bn in April to $69.9bn in May, according to BlackRock.

As is usually the case, the US stock market hoovered up the vast majority of the money with May’s $55.7bn of net buying, a sharp bounceback from April’s insipid $18.1bn.

But emerging markets also saw demand, attracting $3.9bn, up from $1.4bn in April. European equities garnered $2.4bn and although this was below April’s $3.1bn, Chedid believed it was part of a longer term, ongoing pattern.

“This has continued the trend of European equity ETF buying year-to-date,” which has now hit $10bn, with a quarter of this coming from US investors, something that has not been commonplace in recent years, said Chedid.

Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, cited “supportive earnings and economic momentum trends” in Europe, as “a likely catalyst for the recent turn in sentiment”, which has induced four consecutive months of European equity ETF buying by US investors. 

Chedid eyed a continuation of this trend. “We do think it has room to go further,” he said. “We think [European equity ETFs] are under-owned. The aggregate amount that has come into them this year only reverses the outflows that we saw last year.” Total AUM is still $11bn off the peak, set in April 2022, he said.

Despite this, Scott Chronert, global head of ETF research at Citi, who focuses on US-listed ETFs, noted that emerging markets attracted more money than non-US developed markets in May, despite weaker performance.

Overall, net inflows to US-listed ETFs hit $90bn in May, according to Bartolini. This was the best May reading ever and the ninth-highest monthly tally full stop, he added.

Within that, actively managed ETFs pulled in $22bn, their 50th straight month of inflows and the third-highest monthly total ever, according to Bartolini.

“As investors continue to tap a new vehicle for alpha generation and outcome-driven strategies, active ETFs have now taken in over $108bn for the year, or 33 per cent of all [US-listed] ETF flows,” he added. “This pace is unlike anything we have seen.”

In contrast, US investors redeemed money from thematic ETFs for the ninth time in the past 10 months. As a result, thematics have now caught up with ETFs that follow an environmental, social and governance (ESG) based mandate in the unpopularity stakes, with both having leaked $12bn over the past two years.

Globally, technology ETFs saw their first month of outflows since June 2023 but the lower profile utility sector shone, with inflows of $854mn, the highest tally since September 2022. Chedid believed some investors were, once again, starting to eye the traditionally high dividend-paying sector as a bond proxy, with developed market policy interest rates finally starting to be trimmed.

“Utilities are interesting when we consider that the European Central Bank started cutting rates on Thursday, the Bank of Canada on Wednesday, so the [developed market] rate cutting cycle has begun. That means that the sectors that are considered bond proxies may be interesting,” said Chedid, who also put infrastructure in that category.

The flows data was not universally upbeat, though, with Japanese equity ETFs leaking $6.9bn, their first negative month since November.

The selling was led by ETFs listed in the Asia-Pacific region, probably domestic Japanese funds, although BlackRock’s data is not granular enough to be certain.

Chedid attributed this to profit-taking and foresaw continued buying by international investors with, for instance European portfolios currently under allocated to Japanese equities, which account for 3.6 per cent of the average equity allocation, below Japan’s 5.4 per cent weighting in the MSCI All Country World Index.