2023 ETF Outflows Reflect Changing Investor Preferences in US Equities, Bonds, and Thematic Sectors
A surprising shift in investor sentiment was revealed as exchange-traded fund (ETF) outflows in 2023 highlighted changing preferences in US equities, bonds, and thematic sectors. Although European ETFs experienced their second-strongest year of asset gathering on record, several ETFs saw significant outflows, including some of the winners from 2022.
The year began with cautious optimism as investors prepared for a potential recession and anticipated prolonged central bank policy rates. However, the mood soon changed, with no recession materializing and a narrow rally in a handful of US tech mega-cap equities. Against this backdrop of central bank posturing, bond yield volatility, and concentrated equity leadership, let’s review the five ETFs that saw the highest redemptions in 2023.
One interesting theme that emerged was investors becoming more intentional with their US equity allocations. The dominance of the magnificent seven companies in the market prompted some investors to reevaluate their portfolios. As a result, two S&P 500 ETFs experienced significant outflows, with the Xtrackers S&P 500 Swap UCITS ETF 1C (D5BM) losing $1.5 billion and the Amundi S&P 500 UCITS ETF (500) losing $1 billion. The relatively uncompetitive fees of these ETFs likely contributed to the outflows, as they carried higher expense ratios compared to other options.
However, it’s worth noting that the ‘1D’ share class of the Xtrackers S&P 500 Swap UCITS ETF 1C (D5BM), launched in 2022 with a lower fee, actually attracted $1.8 billion in new assets. This trend of investors gravitating towards lower-cost options also played out within the DWS roster, as the Xtrackers MSCI USA UCITS ETF 1C (XMUS) experienced outflows of $686 million, while its ‘1D’ iteration saw inflows of $878 million.
In addition to the US equity space, investors also pulled $1.4 billion from the iShares MSCI USA SRI UCITS ETF (SUAS), which incorporates environmental, social, and governance (ESG) factors into its investment strategy. Despite cutting the weight of the tech sector in SUAS, some investors may have been wary of the sector’s relative overweighting within ESG strategies and the resulting performance drag.
Although smart beta ETFs had a strong year in 2022, some of these strategies experienced outflows in 2023. The iShares Edge MSCI USA Value Factor UCITS ETF (IUVL) saw $1.4 billion in outflows, likely due to its lack of exposure to the ‘magnificent seven’ stocks, which resulted in significant underperformance. Similarly, the SPDR S&P U.S. Dividend Aristocrats UCITS ETF (UDVD) and the iShares Edge MSCI World Minimum Volatility UCITS ETF (MVOL), which both overweigh defensive sectors, saw outflows of $1.1 billion each.
Investors also scrutinized their fixed income allocations in light of changing market conditions. As bond yields fluctuated, some investors opted for average duration exposure by barbelling short and longer duration exposures. This led to outflows of $1.3 billion from the Invesco US Treasury Bond UCITS ETF GBP Hedged (TRGB) and the Invesco US Treasury 7-10 UCITS ETF (TREX). However, ETFs such as the iShares $ Treasury Bond 20+yr UCITS ETF (IDTL) and the iShares $ Treasury Bond 0-1yr UCITS ETF (IB01) benefited from this approach and saw combined inflows of $6.7 billion.
Notably, investors also adjusted their currency bets as the US dollar weakened against other currencies. This led to outflows of $1.3 billion from the iShares J.P. Morgan $ EM Bond UCITS ETF (IEMB), which had a significant allocation to Mexico, where the US dollar depreciated. Similarly, investors withdrew $986 million from the Lyxor EUR 2-10Y Inflation Expectations UCITS ETF (INFL) as concerns around inflation in the Eurozone dissipated.
The decline in energy prices also affected ETF flows. The iShares S&P 500 Energy Sector UCITS ETF (IEUS) saw outflows of $868 million after a strong performance in 2022. Finally, the iShares Global Clean Energy UCITS ETF (INRG) experienced outflows of $709 million as the sector faced challenges and declined in value.
Overall, the outflows from these ETFs in 2023 reflect changing investor preferences in US equities, bonds, and thematic sectors. Investors are becoming more intentional with their allocations, gravitating towards lower-cost options, adjusting their exposure to specific sectors, and reevaluating their fixed income and currency bets. As market conditions evolve, it is crucial for investors to stay informed and adapt their portfolios accordingly.
Note: The article content has been paraphrased while maintaining the original ideas and structure.
