Capital Markets Desk: ETF 2019 Flows: Three Interesting Takeaways

Here’s a midyear check-in on 2019 ETF flows, as well as where investors are allocating them.

    David Mann

    David MannHead of Global ETF Capital Markets,Franklin Templeton

    We just crossed the midway point of the year, which is a perfect time for another check-in on the ETF flows for 2019, as well as where investors are allocating them.

    So far this year, a hair under $120 billion has flowed into ETFs in the United States.1

    There are three very interesting stats I would like to share, some of which almost seem contradictory to one another.

    1. 85% of all flows went into funds with management fees under 10 bps (0.1%)
    2. 75% of all equity flows went into smart beta ETFs
    3. 62% of all flows went into fixed income ETFs2

    Let’s start with the first point about flows into low-cost ETFs, which is something we talked about back in my 2018 outlook post.

    There is a growing group of investors who are index-agnostic and simply want exposure to a given asset class as cheaply as possible. That has been a growing trend borne out by recent

    ETF flows, and it is one of the biggest factors behind the launch of our passive suite of funds.

    Given the ease of trading, in my opinion, there really is no excuse for using higher-fee funds of similar exposure—unless you are part of the also growing group of investors who are looking for a specific portfolio that provides a specific outcome. In this case, the rules of the index matter. The philosophy of the fund matters. The performance matters. That was my lead for my 2019 industry predictions.

    A “Smarter” Equity Investor?

    I had predicted inflows into smart beta ETFs would reach $100 billion this year, and although we don’t seem to be at a pace to hit it, I think the percentage of equity assets flowing into smart beta is very impressive. As to why this is happening, a couple possibilities come to mind.

    The first is that investors have acknowledged there are other index rules besides simply letting market price determine the weight of the stock. The second is that many of these smart beta funds have performed very well over the past few market cycles.3

    Fixed Income Favored

    Lastly, it is impossible to ignore the fact that well over half of the flows in 2019 have gone to fixed income ETFs. With all the attention in 2019 on what the Federal Reserve might do and where interest rates might go, it is no surprise to see so much activity within the fixed income ETF space. What is somewhat new in 2019 is that many investors have realized ETFs are a great vehicle to express those fixed income views.

    I think it is only a matter of time before all three of these trends collide, and investors start gravitating to both active and smart beta fixed income funds.

    For now, the flows are going mainly into traditional passive fixed income funds. Hmmm…perhaps we have our first entry into the 2020 predictions column…


    1. Source: Bloomberg, as of July 1, 2019.

    2. Ibid.

    3. Past performance is not an indicator or guarantee of future results.