Crunch Time: ETFs Close in on $1 Trillion Record

Let’s look at investor interest in different ETF segments by studying last month’s ETF inflows and outflows across asset classes and consider what they indicate about expectations for this month.

The final two minutes of a football game can be intense, defining a team’s entire season or legacy. I’m thinking about what fans have come to call the “13 seconds game” between the Kansas City Chiefs and the Buffalo Bills when the Chiefs marched down the field in 13 seconds to tie the game, sending it into overtime and eventually winning.

Plain and simple, the market and investors now find themselves inside the “final two.” And it’s crunch time.

With two months left in 2024, broad cross-asset market performance has been stellar.¹ This is the first year since 2019 that stocks, bonds, and commodities have all been up at the same time — benefiting portfolio returns.²

But capital markets enter the final two months on a negative note. In October, global stocks and bonds both fell for the first time since April.³ US Treasurys posted their worst monthly loss since 2022, as did non-US equities, which slumped 5%.⁴

But ETF inflows remained strong, putting the $1 trillion record for 2024 within reach.

Big October Puts $1 Trillion in Play for ETFs in 2024

At the end of September, US-listed ETFs surpassed $10 trillion in assets under management — a significant milestone. And with more than $120 billion of inflows in October, US-listed ETFs burst through another milestone like the Kool-Aid man crashing through a wall.

For the first time ever, ETFs have taken in more than $1 trillion over a 12-month period, using weekly frequencies (Figure 1). And this figure has been above $1 trillion for three consecutive weekly review periods — an indication of potential staying power.

This milestone reinforces our conviction that ETF inflows for 2024 will hit $1 trillion. Current year-to-date inflows are $830 billion, and there is typically a seasonal bump in the final two months of the year. On average, November and December inflows historically have been 164% greater than the monthly average for the first 10 months of the year. Based on an average monthly inflow of $82 billion so far this year, another $270 billion could come in during the final two months of the year.

Based on that potential final two-month boost, flows for 2024 could be $1.091 trillion — $180 billion more than the prior annual record of $909 billion in 2021.

And with mutual funds in net outflows of -$150 billion,⁵ ETFs are the vehicle of choice for investors deploying capital — strategically or tactically.

Commodities Back in Favor, US Equities Top Pick

Broad-based commodity ETFs saw their first month of inflows since May — taking in $370 million. And of the $4 billion into commodities overall, $2.6 billion flowed into gold-backed ETFs.

October was gold ETFs’ fourth month in a row with inflows — with $7 billion taken in during that period as investors positioned for lower real rates, a weaker US dollar, and an uncertain macro climate.

This four-month stretch of positive gold flows is one month away from being the longest streak of inflows since 2020. And gold’s trailing three-month figure is now at its highest level since 2022 (Figure 2).

Within equities, US equity exposures continue to attract assets. With $61 billion of inflows in October, equities have now taken in $438 billion this year.

Based on this pace, US equity ETFs may have record calendar-year flows in 2024, surpassing the $485 billion of inflows from 2021. If these trends hold, US equity ETFs could have $516 billion of flows this year — not surprising given that US returns have dominated the rest of the world.

Non-US equity ETFs’ $19 billion of inflows in October accounted for 23% of all equity flows. This share capture rate is above the year-to-date capture rate (17%) as well as what their asset market share would indicate (19%).

While this could be viewed as a sign that investors were broadly looking overseas for opportunities, single-country China ETFs made up 52% of all non-US equity ETF inflows (+$10.2 billion). And China made up 104% of the single-country ETF flows, as there was little interest to play single countries outside of China-related trends.

With such strong flows in October, driven by exuberance and short covering, current flows for China-focused ETFs rank as the most-ever over any three-month period. A staggering 219% greater than the prior record set back in 2021!

Equity Sectors Favor Cyclicals, Bond Sectors Favor Credit

After $5 billion of outflows in September, sector exposures rebounded with $4 billion of inflows in October. While Tech had $2 billion of inflows, cyclical sectors’ $3.3 billion of inflows forcefully led broader sector inflows.

Within that cohort, Financials, Industrials, and Consumer Discretionary all had over $700 million of inflows. Energy and Materials were the only cyclical sectors with outflows in October, consistent with the 2024 activity for those sectors.

The renewed interest in cyclicals, a grouping which has had outflows in four out of the past six months, stems from the likelihood of additional Fed rate cuts amid continued upbeat economic data, a durable consumer, and strong earnings results.

While nine out of 11 bond sectors had inflows in October, the melting pot Aggregate sector took 50% of bond flows. Yet, of the $16 billion into the segment in October, $9 billion went into active ETFs while $7 billion went to low-cost core Aggregate exposures — two strategic categories.

Bond inflows also help illustrate some tactical positioning. Credit sectors saw $6 billion of inflows in October, led by $3.3 billion in senior loans and CLOs.

Hybrid credit sectors also saw inflows, with preferreds taking in $415 million and convertibles adding $343 million. Convertibles’ inflows represent a near 6% increase in assets — the second-largest relative growth rate out of any sector following the almost 10% figure for senior loans and CLOs.

On the year, credit sectors now have $67 billion of inflows. This equates to 28% of all fixed income ETF flows, a share capture above the 26% of share of fixed income ETF assets — a clear overweight to credit from ETF investors.

Sounding the Two-minute Warning

Every team has a two-minute playbook. And in these final two months, like a defense playing prevent coverage to stop the deep ball in the final two minutes, markets need to defend against the macro risks of election impacts (not just in the US but overseas in Japan), evolving global monetary policies, and geopolitical conflicts in multiple regions.

Fortunately, the market has some playmakers to put the game on their shoulders. Earnings growth is coming in stronger than initially expected, at +9% in the US and +3% in Europe.⁶ US economic data continues to reveal durable resiliency, while eurozone growth just surprised to the upside.

Although growth is upbeat, investors’ two-minute playbook features adding as much macro environment diversification to portfolios as possible.

Because current equity concentration risks and a high level of co-movement between stocks and bonds⁷ limit the traditional portfolio’s durability, alternatives may be the play call. Alternative assets may help balance beta risks and improve overall portfolio resiliency amid macro uncertainty in the final two months of the year.

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