ETF investors mirrored a surprisingly upbeat backdrop for markets last year, with swathes of outflows from previously popular inflationary and monetary policy hedges.
Despite ETFs in Europe booking their second strongest year of asset gathering on record in 2023, at least seven ETFs booked over $1bn outflows – with some 2022 winners being among the worst casualties.
With many having started last year on a cautious footing, readying for recession and ‘higher for longer’ on central bank policy rates, the mood music soon changed to no recession, an end to rate hikes and a narrow rally by a handful of US tech mega-cap equities.
In a year of central bank posturing, bond yield volatility and concentrated equity leadership, ETF Stream reviews the five ETFs that saw the most redemptions in 2023.
The US tide not for all boats
An interesting first theme was investors becoming more intentional with their US equity allocations as ‘magnificent seven’ dominance flagged the market’s role within portfolios.
While two S&P 500 ETFs amassed more than $4bn assets apiece in 2023, investors pulled $1.5bn and $1bn from the $8.1bn Xtrackers S&P 500 Swap UCITS ETF 1C (D5BM) and the $7.3bn Amundi S&P 500 UCITS ETF (500), respectively.
The key reason for the outflows from the two products likely owes to their relatively uncompetitive fees. While State Street Global Advisors (SSGA) cut the fee on its S&P 500 ETF to 0.03% in October last year, the lowest of any ETF in Europe, DB5M and 500 both carry total expense ratios (TERs) of 0.15%.
Also, while DB5M, which launched in 2010, booked the highest outflows of any UCITS ETF in 2023, the ‘1D’ share class of the ETF, which listed in 2022 with a fee of 0.07%, welcomed $1.8bn new assets.
A mirror scenario played out elsewhere in the DWS roster, with the $5bn Xtrackers MSCI USA UCITS ETF 1C (XMUS) – carrying a 0.15% fee – ceding $686m assets while the ‘1D’ iteration – with a 0.07% fee – amassed $878m inflows.
Outside of vanilla US equity, investors pulled $1.4bn from the $9.6bn iShares MSCI USA SRI UCITS ETF (SUAS). While some may think this owes to investors being wary of the relative tech sector overweight that tends to exist within ESG strategies, SUAS actually cuts the weight of the tech sector to almost half versus its parent benchmark.
Although investors have looked to strategies including equal-weight ETFs to cut their US tech exposure, this deviation from SUAS’s parent index and the resulting performance drag may have proven too burdensome for some investors to absorb in 2023.
Defensive beta was off
Underweighting growth-related sectors was also the ailing factor for several smart beta ETFs, which suffered outflows after their most triumphant year in a decade in 2022.
Claiming a top three spot within outflows last year, the $2.2bn iShares Edge MSCI USA Value Factor UCITS ETF (IUVL) saw a $1.4bn exodus.
Although IUVL is sector neutral versus the MSCI USA index, it notably does not feature any of the ‘magnificent seven’ within its basket, leading to more than 15% underperformance versus its parent benchmark in 2023.
Likewise, the $3.9bn SPDR S&P U.S. Dividend Aristocrats UCITS ETF (UDVD) and $2.7bn iShares Edge MSCI World Minimum Volatility UCITS ETF (MVOL), which overweights typically defensive sectors including healthcare and utilities, both saw $1.1bn outflows apiece.
With the US consumer price index (CPI) hitting a four-decade-high of 9.1% in June 2022 and the Federal Reserve hiking rates at the fastest pace since the turn of the millennia, all but one factor – growth – beat global equity benchmarks in 2022.
Through a combination of AI mania and hopes of rate cuts in 2024 enabling growth names to stop discounting future cash flows, old economy sectors and smart beta strategies returned to pack chasing status last year.
Reshuffle in US Treasuries
The ‘bonds are back’ narrative also saw investors put their fixed income allocations under the microscope, using ETFs to implement average duration in or around the middle of the curve by barbelling short and longer duration exposures.
The top outflows within bond ETFs saw the $200m Invesco US Treasury Bond UCITS ETF GBP Hedged (TRGB) shed $1.3bn assets as investors reshuffled their currency bets while non-currency-hedged share classes of the same ETF saw more modest inflows and outflows.
Meanwhile, the $2.1bn Invesco US Treasury 7-10 UCITS ETF (TREX) also booked $1.3bn outflows as many European fund selectors looked to allocate either end of the curve.
While this places their average duration in the belly of the curve, they are hedge either ‘higher for longer’ or rate cutting scenarios, rather than capturing the middle of the curve directly.
Key beneficiaries of this approach were the $8.5bn iShares $ Treasury Bond 20+yr UCITS ETF (IDTL) and $12.8bn iShares $ Treasury Bond 0-1yr UCITS ETF (IB01), which welcomed $6.7bn net new assets combined.
The search for more targeted fixed income allocations was also illustrated by BlackRock and DWS launching suites of target maturity ETFs in 2023, offering baskets of sovereign and corporate debt maturing within the same year.
Implementing the pivot
A more dovish monetary policy backdrop also saw investors take off some of their hedges against policy hikes across western economies.
After the US dollar was bolstered by the Fed’s first four consecutive 0.75% rate hikes in decades in 2022, expectations of a policy pivot saw the greenback climb down against other currencies last year.
This saw the $7.2bn iShares J.P. Morgan $ EM Bond UCITS ETF (IEMB) book $1.3bn outflows. IEMB’s largest country allocation is to Mexico – and the US dollar fell 13.1% against the Mexican peso in the year to 27 December last year.
Elsewhere, last December’s eurozone year-on-year CPI print of 3.1% was the lowest since August 2021, signalling another inflation spike across the bloc to be a risk rather than the base case. Supporting this, investors pulled $986m from the $309m Lyxor EUR 2-10Y Inflation Expectations UCITS ETF (INFL).
The reverse side of this trade – and relative economic weakness across the EU – supports the case for multiple rate cuts by the European Central Bank in 2024. This saw investors pile a considerable $5bn into the $17.9bn iShares Core € Corp Bond UCITS ETF (IEAC), marking the second-highest inflows of any ETF in Europe last year.
Energy takes a back seat
Finally, after being one of the key drivers of inflation, energy prices and the equities correlated to them fell from their lofty heights.
After WTI Crude fell from a high of almost $121 in 2022 to little over $74 a barrel by the end of 2023, the $870m iShares S&P 500 Energy Sector UCITS ETF (IEUS) saw $868m outflows over the past 12 months.
This likely came as investors took profits after a 64.8% gain in 2022, prior to the -1.9% return in 2023.
Finally, Europe’s thematic darling, the $3.9bn iShares Global Clean Energy UCITS ETF (INRG), suffered $709m outflows after hitting a more than three-year low by November last year, down 56.6% from its all-time-high in 2020.
