The Potential Move From Mutual Funds to ETFs During a Bear Market in 2022
- Shams ul Zoha
- December 7, 2022
- 11:56 am
WHAT YOU SHOULD KNOW
- In 2022, ETFs have seen record-high inflows, though lower than 2021. Investors have been motivated to switch from mutual funds to ETFs due to their tax-friendliness and lower expense.
- ETFs currently have approximately $6.6 trillion in assets under management.
- ETF investments have increased monthly and most of the capital invested in government debt was allocated to short-term bonds. BlackRock sees potential for ETF investors to benefit from the damage done to stocks and bonds in the next four years.
Despite the bear market this year, the influx of capital into exchange-traded funds is still reaching record highs, though it has dropped from 2021.
By the end of November, exchange-traded funds (ETFs) listed in the United States had attracted $568 billion in assets for the year 2022 and were on track to reach an estimated $622 billion in annual inflows based on the average December flows observed over the past decade, according to a report from State Street Global Advisors.
According to the report, 2021 has been the first year in which flows exceeded $600 billion, and this would be the second time this has happened in a calendar year.
Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, remarked that the bear market has been a catalyst for a shift away from mutual funds and towards ETFs. He spoke about this topic in a phone conversation.
Many investors have been motivated to take action due to the losses they have incurred or the modest returns they have received, which are not enough to offset the capital gains taxes that come with switching to ETFs, which are generally less expensive and more tax-friendly than mutual funds, according to Bartolini.
Despite the bear market this year, the influx of capital into exchange-traded funds is still reaching record highs, though it has dropped from 2021.
By the end of November, exchange-traded funds (ETFs) listed in the United States had attracted $568 billion in assets for the year 2022 and were on track to reach an estimated $622 billion in annual inflows based on the average December flows observed over the past decade, according to a report from State Street Global Advisors.
According to the report, 2021 has been the first year in which flows exceeded $600 billion, and this would be the second time this has happened in a calendar year.
Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, remarked that the bear market has been a catalyst for a shift away from mutual funds and towards ETFs. He spoke about this topic in a phone conversation.
Many investors have been motivated to take action due to the losses they have incurred or the modest returns they have received, which are not enough to offset the capital gains taxes that come with switching to ETFs, which are generally less expensive and more tax-friendly than mutual funds, according to Bartolini.
At the end of November, the ETF industry had an estimated $6.6 trillion in assets under management, as reported by Bartolini.
The total debt held by the public decreased from $7.3 trillion in the previous year to a lower figure. Yet, it remains higher than what has been seen in recent years.
U.S.-listed ETF assets have seen a dramatic increase since 2017 when they totaled $3.4 trillion. According to data emailed by Bartolini, the figure has now risen to $5.5 trillion in 2020.
Recently, there has been an increase in the rate of exchange-traded fund (ETF) investments monthly.
According to the State Street report, the $174 billion inflows recorded over three months up to November was among the highest ever seen, ranking in the 91st percentile of all historical records. It was also one of the top 20 inflows ever recorded over such a rolling period.
In his State Street report, Bartolini suggested that bond ETFs were a major factor in the quickened pace of investment. When contacted by phone, he noted that investors had been putting money into high-yield corporate bonds in the past two months, reversing the trend of outflows that had previously been seen.
He cautioned that it is difficult to be overly enthusiastic about speculative-grade debt for the year 2023, commonly referred to as junk bonds, due to the possibility of a recession on the horizon.
Investment-grade bonds are generally considered less susceptible to default than high-yield bonds.
According to Bartolini, short-term, investment-grade corporate bonds are the best option for 2023. He suggests bonds with maturities of one to three years and yields approximately 5.5%.
According to the State Street report, fixed-income flows saw the highest amount of government debt in the three months ending in November.
During the specified period, most capital invested in government debt was allocated to short-term bonds.
In the next four years, BlackRock sees excellent potential for ETF investors to benefit from the damage done to stocks and bonds. By 2023, investors may be able to capitalize on the opportunities created in the market. With careful planning, ETF investors may be able to make the most of the current situation and reap the rewards in the future.
Equity exchange-traded funds (ETFs) have seen a major influx of assets in 2020, with more than double the amount of money going into them compared to fixed income funds, according to State Street. This trend has been seen through November of this year.
Year-to-date, commodity ETFs have seen a decrease in investments, according to the report.
According to Bartolini, November saw investors continuing to favor defensive sectors, with inflows to these areas reaching a record 13 consecutive months. This preference for defensive stocks indicates a bias towards caution within the equity markets.
Last month, State Street observed that healthcare and consumer staples were the most sought-after defensive sectors.
According to the report, ETFs that focus on two areas experienced the most substantial sector inflows in November.
Investors continued to be drawn to dividend funds last month, with ETFs that focus on dividend-paying stocks experiencing 27 consecutive months of inflows, the report noted.
According to Bartolini, dividend strategies may be an ideal option for investors worried about corporate earnings. He stated that these strategies have a “unique combination of value and quality” that could be beneficial in such an environment.
John cautioned that dividend stocks are not entirely safe investments. “They aren’t ‘100% defensive,'” he remarked.
John suggested that the strategy could be beneficial due to its cyclical nature and even result in a positive surprise.
Shares of the iShares Select Dividend ETF (DVY) have experienced a slight decline of 0.5% in the year up to Wednesday, with a total return of 2.1%, as per data from FactSet.
The SPDR S&P 500 ETF Trust (SPY) experienced a 16.3% decrease in total return over the same period, representing a contrast to the +2.29% gain.
State Street has seen a surge in demand for ETFs focusing on stocks from regions other than the U.S. this year, as reported by Bartolini.
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