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Portfolio > Economy & Markets > Fixed Income

Fixed Income Outruns Equities in August ETF Flows

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Despite a bullish month for stocks, investors seemed to prefer fixed income exchange-traded funds in August.

According to the US ETF Flash Flows report from State Street Global Advisors, fixed income outpaced equities by nearly $2.4 billion.

“Investors are embracing fixed income to use as part of their portfolio,” said David Mazza, head of research for SPDR ETFs and SSgA Funds, in an interview with ThinkAdvisor.

In contrast to prior months, fixed income ETFs accounted for more than half of the $14.8 billion of inflows into U.S.-listed ETFs in August, attracting nearly $8.4 billion of new assets.

Mazza attributes some of fixed income’s growth over the last month to the pockets of volatility the equity markets faced at the start of August with rising tensions in the Middle East and Ukraine, revealing that some investors remained cautious as summer was winding down. In June and July, Mazza adds, equity ETFs took in a significant level of assets.

While equity ETFs remain well in the lead for the year with a year-to-date flow of more than $66 billion, Mazza says fixed income is growing at a much faster rate. According to the report, year-to-date asset class flows have increased by 12.74% for fixed income and 4.95% for equity.

Mazza points to the diversification fixed income ETFs can offer investors as well as the lower interest rate risk than traditional fixed income investments as the reason for some of that growth seen in the fixed income ETF class.

Emerging Markets

One of the biggest trends that Mazza said is beginning to appear is investors rotating out of Europe and into emerging ETFs.

While emerging markets significantly underperformed last year, Mazza said he saw interest grow in emerging market ETFs in July and is continuing to see it in August.

“Significant risks remain in emerging markets; however, with accommodative monetary policy improving and inexpensive valuations in the market, emerging is looking increasingly attractive and has continued to see inflows,” the report said.

Mazza noted that while Europe’s economy seemed to be on firmer footing, the fallout in Ukraine and other tensions impacted investor confidence.

“So they’re looking at other opportunities outside Europe,” he said in an interview with ThinkAdvisor.

 All the while, he added, the U.S. continues to look favorable.

“Investors would seemingly be gravitating toward U.S. stocks after earnings in the second quarter grew by approximately 10% helping to prove that last year’s multiple expansion may have been the re-rating that the market deserved,” the report states.

Consumer Discretionary

Another ETF flow trend of note, Mazza said, is the interesting movement within the U.S. equity sectors.

Where many investors on a year-to-date basis have significantly favored energy and real estate at the expense of consumer discretionary, Mazza said this has begun to shift slightly.

In August, more than $1 billion moved into the consumer discretionary sector, an 8.35% rise month-over-month. Whereas year-to-date, this sector has seen outflows of nearly 11%. The report shows that consumer discretionary, consumer staples and health care all took in a disproportionate share of flows in August while energy and financials saw modest outflows.

The boosted earnings in consumer discretionary sector could mean “consumers might again be confident,” Mazza added.

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