ETFs inflows take steep drop in first half of 2022, high-yield bonds see ‘massive’ outflows amid recession fears

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Investors aren’t piling into exchange-traded funds like they were in the first half of last year, with inflows falling off steeply amid fears a recession may be looming amid persistently high inflation.

“The first half of 2022 is largely a tale of two quarters,” said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, by phone. “In the first quarter, we were still chugging along at a really record pace and then all of a sudden market sentiment shifted.”

U.S.-listed ETFs have gathered around $223 billion this year through June 28, a “significant deceleration” compared to both the first and second half of 2021, said Bartolini. ETFs attracted around $389 billion in the first six months of last year, he said, with 2022’s inflows so far dropping around 43% from that level.

ETFs inflows are on pace for the “most sluggish” first half since 2020, according to Bartolini.

The slowdown “speaks to some of the more tactical users of ETFs,” who have less appetite for risk in a market that’s trending downwards, he said. Sector ETFs, which may be used to “express a very tactical viewpoint,” have collectively seen outflows of $13.3 billion in the second quarter through June 28. That puts them on track for one of their worst quarters ever after the fourth quarter of 2018, he said.

ETFs focused on the financial sector have suffered “sizable” outflows in the second quarter, with investors so far pulling about $15 billion through June 28, according to Bartolini. While financial firms such as banks stand to benefit from rising interest rates, investors have worried that their “cyclical” nature makes them sensitive to an economic slowdown.

Shares of the Financial Select SPDR Fund
XLF,
which tracks an index of S&P 500 financial stocks, have dropped almost 19% this year through June 29, according to FactSet data. That compares with a nearly 20% slide for the S&P 500
SPX
over the same period, which put the U.S. stock benchmark on track for the worst first half of a year since 1970, according to Dow Jones Market Data. 

In other sector outflows in the second quarter, investors have withdrawn around $3.1 billion from energy ETFs as of June 28, said Bartolini. “I don’t fully understand it,” he said. “I think it’s some profit-taking” after the sector’s strong gains so far this year.

While the stock market has slumped, the Energy Select Sector SPDR Fund
XLE
has soared almost 32% in 2022 through Wednesday as oil prices have climbed. So far this quarter, the energy ETF has fallen about 4.4% through Wednesday, outperforming the S&P 500’s 15.7% drop during the same period.

Read: Energy ETFs are the unloved relative to ‘outstanding’ gains as growth bets in stock market head for worst first half ever

While sector ETFs suffered outflows in the second quarter, they still attracted about $4.5 billion of net inflows this year through June 28, according to Bartolini. He said healthcare — “largely a defensive area” of the market that tends to outperform in an economic slowdown — has seen the most inflows among sectors this quarter as well as so far this year. 

Meanwhile, ETFs focused on financials have seen the largest outflows in 2022 through June 28, followed by funds investing in consumer discretionary, said Bartolini. Shares of the Consumer Discretionary Select Sector SPDR Fund
XLY
have plunged about 32% this year through Wednesday.

Read: Consumer spending slows sharply as inflation hits home

Record high-yield ETF outflows?

Fixed-income has sold off along with equities in 2022, damaging traditional portfolios comprising 60% stocks and 40% bonds amid rising interest rates and the hottest inflation in about 40 years. 

Investors who bought Treasury-inflation protected securities, or TIPS, have also been hurt in the rising rate environment. The iShares TIPS Bond ETF
TIP
has lost about 9% on a total return basis this year through Wednesday, compared with a 10.6% loss for the iShares Core U.S. Aggregate Bond ETF
AGG,
according to FactSet data.

The TIPS fund is faring better than the broad bond market, “but it’s certainly not giving positive returns in an inflationary environment,” said Elisabeth Kashner, director of global fund analytics at FactSet, by phone. “TIPS have duration, so they have a lot of interest rate sensitivity even though they do have an inflation-protection element to them.”

Rising rates hurt the value of bonds, with long duration securities particularly vulnerable. Meanwhile, investors are worried about reaching for yield in risky corporate debt in a slowing U.S. economy.

ETFs that invest in high-yield corporate debt, or so-called junk bonds, have seen “massive” outflows in the first half of this year through June 28, with investors pulling about $15.9 billion, according to Bartolini. That’s left high-yield ETFs heading for potentially their worst first half of a year on record, he said. 

Junk bond performance has been dismal.

The iShares iBoxx $ High Yield Corporate Bond ETF
HYG
has seen a 13.7% loss on a total return basis during the first half of this year through Wednesday, according to FactSet data. The ETF is on course for potentially its worst first-half performance on record. 

Read: Major bond ETFs on pace for worst first half to a year on record 

High-yield bond funds have suffered the largest outflows among U.S.-domiciled ETFs this year through June 27, followed by ETFs focused on U.S. financials and inflation-linked U.S. government debt, according to FactSet’s Kashner. 

The fourth largest outflows over the same period were from equity ETFs targeting the total market of developed Europe, and the fifth biggest withdrawals so far in 2022 are from U.S. consumer discretionary funds, her research found.

Biggest 2022 inflows

The top five categories of U.S.-domiciled ETFs for inflows through June 27 are mostly in equities but also include ultra-short-term Treasurys, according to Kashner. She found that ETFs that buy U.S. large-cap stocks attracted the most capital over that period, followed by equity funds focused on high dividend yield and the total U.S. market. 

The fourth largest inflows were captured by fixed-income ETFs that invest in ultra-short-term Treasurys, with exchange-traded funds targeting U.S. large-cap value stocks ranking fifth so far in 2022, according to Kashner’s research.

“Right now, one of the things we like is a value and min vol and barbell,” said Lukas Smart, head of U.S. iShares sustainable and factors strategies at BlackRock, by phone.

Shares of the iShares MSCI USA Value Factor ETF
VLUE
are down 16.6% this year through Wednesday, according to FactSet. The iShares MSCI USA Min Vol Factor ETF
USMV,
which is designed to provide a minimum-volatility portfolio of U.S. stocks, has fallen 13% over the same period.

“Min vol” is an option for investors who want to stay invested in stocks in “an uncertain environment with a high degree of inflation,” Smart said. 

As usual, here’s your look at the top and bottom performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

…the bad

New ETFs

• Ionic Capital Management said June 29 that it was launching the actively managed Ionic Inflation Protection ETF (CPII). The new fund will invest in inflation swaps on the consumer-price Index, swap options on U.S. interest rates and short-duration TIPS.

• NightShares announced June 28 the launch of two exchange-traded funds that try to “capture the value from systematically buying at the close and selling at the open.” The new funds are the NightShares 500 ETF
  NSPY
  and the NightShares 2000 ETF
  NIWM.

Weekly ETF reads: