November ETF Flows: Buying Makes a Comeback
- With stocks and bonds rallying, buying behavior surged. ETFs took in $94 billion — their fifth-most ever
- Equity funds’ $65 billion was their seventh-best, driven by $57 billion into US equity ETFs and a rebound of +$8 billion from sector funds
- Bonds’ $27 billion was their eighth-best, driven by risk-on high yield taking in a best-ever $11 billion while government ETFs had outflows (all from ultra-short) for the first time this year
Anytime an NBA team stages a fourth quarter comeback, there is always a spark that alters the in-game momentum, changing both teams’ fortunes. It could be a blocked shot followed by a fast break dunk. Or a player making two deep three-pointers at the top of the key, making you think an announcer will break out the NBA JAM “he is heating up” reference.
New York Knicks fans saw this on Black Friday. The Knicks were down eight to the Miami Heat with four minutes left in the game when, following an injury, Knicks guard Jalen Brunson recovered and scored nine points in 90 seconds. The Knicks went on to win because of his heroic comeback.
Knick fans weren’t the only ones to witness a thrilling comeback in November. The S&P 500 Index posted its best return since July 2022 and is now just 5% from its all-time high.1 Meanwhile, bonds rallied by the most since 1980, and are now positive year to date after being in danger of having losses for three consecutive years.2
With such strong cross-asset returns after months of sluggish returns, buying behavior made a comeback.
ETF Inflows Could Hit $500B by Yearend
Like the 2002 Boston Celtics staging a 26-point fourth quarter comeback against the New Jersey Nets in game three of the Eastern Conference Finals (the greatest fourth quarter comeback in NBA playoff history at that time), ETFs climbed out of a historic hole this fourth quarter. ETFs took in $94 billion in November, their fifth-best ever — and helped US-listed ETF assets reach a new all-time high of $7.65 trillion.
With those thunderous flows, ETFs are now in a great position to break $500 billion for the fourth consecutive year — a streak that was in jeopardy prior to November because ETFs had below-average flows during eight of the months in 2023.
But just like Paul Pierce scoring 19 out his total 28 points in the fourth quarter of that 2002 Celtics comeback game, ETFs tend to make it count when there is little time left:
- Fourth quarter inflows are usually the highest out of any quarter, and so far this year the $126 billion from just two months of Q4 is more than what ETFs took in both Q1 and Q3.
- Flows are running 12% above the historical Q4 pace (+$113 billion for the first two months of Q4), accounting for almost 30% of the flows just this year.
While the industry is still $40 billion away from the $500 billion mark, historical trends indicate that closing that gap is highly probable (Figure 1) because:
- December inflows have averaged $68 billion over the past five years and $55 billion over ten years.
- This year, ETFs have averaged $41 billion a month, more than the current variance to the $500 billion barrier.
Active Sets Record; Bond Inflows Strong
Active ETFs have already set a new annual record for inflows, with a month to go. The $14 billion into active funds in November pushed the full-year total to $116 billion, roughly $10 billion more than the prior record from 2022. And that $14 billion was the second-most inflows ever for active ETFs, led by +$9.6 billion into active equity and $4.5 billion into active fixed income — both second-best ever figures.
Given that active ETFs have averaged $11 billion of inflows a month in 2023, the full-year figure could end up being nearly $130 billion. If so, it would surely push total active assets over $500 billion, as total AUM is now $499.60 billion.
And the $27.5 billion into fixed income ETFs brought the 2023 total just $16 billion away from $200 billion on the year. And over the past three years, fixed income ETFs have averaged $16.9 billion a month, meaning there is a really strong chance that bond ETFs break $200 billion in calendar-year inflows for the third time in four years.
Vibes Turn Risk-On
Both equity and fixed income ETFs put up big numbers in November. But equity inflows were stronger. The relative difference between stock and bond ETF inflows helps illustrate the turn in sentiment.
The rolling 90-day flow differentials between equity and bond ETFs show investors became more enthusiastic to take on risk in November — even more so once you consider $17 billion of the $27 billion of bond inflows from last month were fueled by equity-biased credit exposures. After having sagged heading into November, the rolling 90-day flow differential popped above the long-term median and off the 33rd percentile to the 66th.
US-focused exposures’ $58 billion represented 90% of all equity inflows by geography last month. Yet, the rest of the world did contribute. In fact, all geographic segments posted inflows in November. Outside the US, International-Developed led, posting inflows for 41 consecutive months now.
Figure 3: All Equity Regions had Inflows
| In Millions ($) | November | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM)check |
|---|---|---|---|---|---|
| U.S. | 58,983 | 218,949 | 108,085 | 237,828 | 5.53% |
| Global | 1,432 | 1,781 | 3,069 | 4,570 | 1.06% |
| International-Developed | 2,143 | 41,033 | 6,094 | 46,651 | 7.34% |
| International-Emerging Markets | 879 | 8,455 | -1,052 | 11,009 | 3.95% |
| International-Region | 190 | 3,363 | -3,157 | 3,423 | 6.26% |
| International-Single Country | 1,102 | 6,493 | -489 | 7,661 | 7.11% |
| Currency Hedged | 176 | 2,594 | 464 | 2,462 | 23.97% |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of November 30, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.
Sectors took in $8 billion in November, their first month of inflows since July, cutting their year-to-date net outflow figure in half to -$7.9 billion from -$15.5 billion at the end of October. 2023 still looks to be the worst year of sector outflows, since up until November sentiment was decidedly restrained.
Within sectors, cyclicals outpaced defensives amid this risk-on positioning. The latter had outflows of $1.4 billion, led by Consumer Staples. Yet all three defensive sectors (Staples, Utilities, and Health Care) had outflows.
Figure 4: Sectors Led by Growth and Cyclicals
| In Millions ($) | November | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
|---|---|---|---|---|---|
| Technology | 5,521 | 8,747 | 2,856 | 7,683 | 5.90% |
| Financial | 1,978 | -1,335 | -3,645 | -2,952 | -2.15% |
| Health Care | -131 | -8,804 | -3,396 | -9,307 | -8.47% |
| Consumer Discretionary | 838 | 4,162 | -109 | 3,728 | 18.20% |
| Consumer Staples | -948 | -3,024 | -3,176 | -2,571 | -9.60% |
| Energy | -195 | -6,080 | 3,574 | -6,412 | -7.02% |
| Materials | 306 | -1,927 | -583 | -1,901 | -5.25% |
| Industrials | -256 | 1,311 | -650 | 1,642 | 3.90% |
| Real Estate | 132 | -2,282 | 252 | -1,553 | -3.26% |
| Utilities | -375 | -1,827 | -1,517 | -2,369 | -6.98% |
| Communications | 667 | 3,074 | -332 | 2,996 | 26.66% |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of November 30, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.
Bonds Go Risk-On Too
Bonds took in $27.5 billion in November, and the sectors that made those inflows the eighth-best all-time were not the sectors that have propelled bond flows all year. There was a defined shift in sentiment and risk was expressed in bonds, in addition to equities.
Throughout 2023, bond flows have been supported by record-setting inflows into government bond exposures, namely the over $50 billion into cash-like ultra-short duration government bond ETFs which had their third-most ever inflows in October.
That all changed in November as rates fell and rate cut expectations increased — trends that push forward the challenge of reinvestment risk for all those assets parked in the shortest tenors of the market.
Ultra-short government bond ETFs posted outflows for the first time this year, losing $7.1 billion in November. With inflows further out on the curve (+$3.8 billion), the broader government bond category posted only $3 billion of outflows.
Credit exposures benefited from this negativity. High yield, Bank Loans, and IG Corporate sectors took in a combined $17 billion. Add in the $2 billion to EM Bond funds and the $470 million into Preferreds and the total “risk-on” bond allocations in November totals almost $20 billion.
Figure 5: High Yield Flows Post Records
| In Millions ($) | November | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
|---|---|---|---|---|---|
| Aggregate | 6,535 | 61,254 | 17,396 | 71,427 | 14.87% |
| Government | -3,064 | 103,795 | 27,922 | 111,844 | 37.08% |
| Short Term | -7,133 | 47,335 | 11,197 | 51,835 | 29.05% |
| Intermediate | 431 | 20,979 | 5,628 | 22,770 | 23.14% |
| Long Term (>10 yr) | 3,638 | 35,481 | 11,097 | 37,239 | 78.14% |
| Inflation Protected | -2,145 | -14,708 | -3,757 | -17,151 | -18.87% |
| Mortgage Backed | 1,484 | 11,204 | 3,959 | 11,539 | 22.42% |
| IG Corporate | 5,159 | 6,422 | -2,689 | 8,228 | 2.83% |
| High Yield Corp. | 10,825 | -53 | 4,102 | -2,748 | -0.08% |
| Bank Loans | 1,014 | -449 | 1,518 | -979 | -3.37% |
| EM Bond | 1,928 | 685 | 14 | 1,294 | 2.57% |
| Preferred | 471 | 286 | 58 | -249 | 0.87% |
| Convertible | 23 | -1,392 | -1,035 | -1,435 | -22.49% |
| Municipal | 4,675 | 13,591 | 8,845 | 17,309 | 12.80% |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of November 30, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance.
The re-risking in bonds is starker when comparing the cumulative flow trends between the ultra-short and short-term government bond sector and below investment-grade ETF exposures (high yield and senior loans). They had been moving in different directions all year and then the comeback happened (Figure 6). That black line in Figure 6 also resembles the same massive spike in the Celtics’ win probability during the fourth quarter of that 2002 playoff game.
How to Sustain the Comeback
With such strong returns last month amid the comeback, the standard 60/40 portfolio is now just 50 basis points (bps) away from posting double-digit returns (9.5%).3 The driver of this significant cross-asset exuberance? Bad news that is good news.
Data on consumer spending, inflation, and the labor market all cooled in recent weeks. This added to the evidence that growth has been gradually slowing and that Federal Reserve (Fed) rate cuts are closer than previously thought. The fact that rates fell by 60 basis points in November means they could also snap higher if hawkish sentiment overcomes the hopes for dovish policy.
After all, some of the decline in rates was due to short covering and that’s not entirely an organic source of enthusiasm. Geopolitical macro events are also still in play and could impact the volatility regime across many asset classes.
Investors might consider that while riding the hot hand in basketball can help sustain and finish a comeback, focusing on both offense and defense helps prevent star players from getting exhausted in the final moments.
So amid this comeback and macro backdrop, investors should focus on equity markets with more quality and durable fundamental foundations to balance upside and downside. Durability is also key in fixed income. This means striking a balance between income and stability to help navigate a still volatile bond market.
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