Investors poured cash into passive funds at the beginning of the year, with global exchange-traded funds seeing inflows s twice the average inflows of the past nine years, data from Morningstar Direct revealed.

The nine-year average for monthly flows into ETFs globally is $22 billion, while in January worldwide ETFs recorded inflows of $63 billion. This was the highest monthly figure since September 2015, when ETFs saw global inflows of $73 billion.

The most popular ETFs were those invested in US fixed income and Japan equities. US fixed income ETFs gained $11 billion inflows in January, the highest inflows in 12 months. January also saw the largest inflows into Japan equity ETFs in nearly four years at $10.2 billion.

More recent figures provided by State Street showed that global ETFs recorded $87 billion inflows in the first two months of 2017. US equity ETFs recorded inflows of $35 billion while fixed income recorded $18 billion inflows.

Within the US equity market, the sectors that have seen the most flows are financials, technology and energy.

Rebecca Chesworth, senior equity strategist for SPDR ETFs said these accelerating inflows were driven by a better macro outlook.

“There was clear profit taking particularly in US Banks in mid-late January, which resulted in flows coming back in February as the market woke up to an increasing inflation forecast, as well as further discussion around deregulation under Trump,” said Chesworth.

Most Popular US Fixed Income ETFs

Within the US fixed income sector, Vanguard Intermediate-Term Corp Bond index fund ETF (VCIT) was the most popular ETF with $1.7 billion inflows in January alone, according to data from Morningstar Direct. It is followed by Vanguard Short Term Bond Index ETF (BSV) and the iShares iBoxx $Investment Grade Corporate Bond ETF (LQD) which recorded $1.5 billion and $1.2 billion inflows respectively.

Looking at what European passive investors were buying, the most popular ETF was the Vanguard S&P 500 ETF (VUSA) which is Gold Rated by Morningstar passive analysts. This ETF saw $640 million inflows in January alone.

This fund is one of the best in its category, said Morningstar passive analysts. The Vanguard S&P 500 ETF offers broad and diversified exposure to US large-cap stocks by tracking the S&P 500, the most oft-cited proxy for the U.S. equity market.

Pension Funds Wake Up to Benefits of ETFs

Exchange-traded funds also draw more money from European pension funds. The share of institutional investors using ETFs for liquidity management reached 45% in 2016, up from 36% a year ago, according to data compiled by Greenwich Associates for BlackRock. The study also reveals that insurers are now the most common users of ETFs among European institutions, surpassing asset managers. Nearly six in 10 pension funds now use ETFs in their portfolios, up from 40% a year ago.

“ETFs are being used by a more diverse range of investors than ever before. Institutions are adjusting their investment approach in response to changing market dynamics, including central bank activity, increased market volatility around events such as Brexit and the US election, and ongoing liquidity challenges in fixed income,” said Fergus Slinger, co-head of iShares Sales EMEA at BlackRock.

Source: Morningstar. Karen Kwok | 03/03/2017

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