After a month in the red with $10.7 billion of outflows, ETF assets bled a little more in March with $2.2 billion of outflows. For the first quarter of 2018, however, U.S.-listed ETFs still posted $60.1 billion of inflows.

That was significantly different from last year’s circumstances, when investors added $45 billion to ETFs in March 2017, and total inflows into ETFs for the first quarter of 2017 were $133 billion, more than double what we saw this year.

This year’s positive flows for the first quarter overall were largely attributable to massive ETF inflows in January. The outflows for February and March of this year were evidence of recent market action weighing on investors. The last time ETFs saw two months of consecutive outflows was nearly a decade ago. The choppiness of flows was fueled by index rebalancing and sustained volatility heading into month end, driven by weakness in technology and concerns regarding trade tariffs, both of which weighed on the broader market.

With the Federal Open Market Committee (FOMC) raising the Federal Funds rate, a casual observer may expect this headwind to create significant outflows from fixed income ETFs. But with volatility among more risky assets increasing, investors continued to seek fixed income to buffer portfolios. With both developed ex-U.S. and emerging markets index performance outpacing their U.S. counterparts in March, international equity showed resilient flows as investors added close to $3.6 billion to the category. Led by inflows into gold-backed ETFs, commodity ETFs also saw modest inflows even as investors sold out of energy-focused products.

U.S. Small Caps See Some Love

In equities, U.S. exposures bounced back, but remained in the red driven by close to $25 billion in net outflows from S&P 500 ETFs. These specific outflows continue to be led by institutional investors trimming long exposure to the market. For context, domestic equity ETFs aside from these S&P 500 ETFs, reported more than $13 billion in net inflows during March. In the face of a risk-off mindset, U.S. small caps outperformed on the month and ETF investors followed suit – small-cap flows have started to outpace large cap. Perhaps the gap in information technology weights is playing a role as the S&P 500 Index has a 10% greater weight to the sector than does the Russell 2000 Index. Interestingly, even in the face of relative underperformance of technology sector ETFs, investors continue to add to these funds, to the tune of $1.6 billion. The last month that IT-focused ETFs were in net outflows was June 2017.

Dividends Are Duds?

In the face of rising rates, dividend ETFs are often seen as less attractive to investors, given these funds’ traditionally greater exposure to stocks with high interest rate sensitivity. As one may expect, dividend ETFs had a weak month in March and have now seen $2.5 billion of outflows in 2018. Those tracking ETFs on a high frequency basis might have noticed some serious head-fake flows. Large blocks of creation units may have indicated strong flows but were in fact driven by ETF rebalancing to help minimize any potential capital gain impacts. These flows were quickly reversed once ETF managers finished rebalancing, and that shift exposed the fact that yield-focused strategies are still on the outs with many investors.

High Yield Remains Unloved

As an asset class, high yield offers investors lower interest rate sensitivity than investment grade, but ETF investors continued to pull money from high-yield bond ETFs, and that made March the fifth month in a row of outflows for this category. Meanwhile, investment-grade credit has been a completely different story, with another strong month. While cross-asset volatility earlier in the year was spurred by a quicker-than-expected pace of rising rates, the markets this past month were driven more by technology’s weakness and geopolitical tensions. Even with rates in the headlines less, investors continued to seek safety in lower-risk bonds, especially those with lower duration and floating coupons ̶ a trend that continues to pick up steam.

Looking at You, Q2

For perspective, last year investors added nearly $115 billion to ETFs in the second quarter, with close to $78 billion going into equity ETFs and $35 billion into fixed income. As institutional investors continue to use ETFs in a more short-term, tactical trading and hedging fashion, we expect their aggregate flows will continue to match market volatility. Yet institutions are not the only ETF investors on the street, as longer-term investors have also gravitated towards the vehicle and do not yet appear fazed by the recent spike in market volatility. Let’s watch to see how both communities of ETF participants affect flows into the second quarter.