After a disappointing February and March that saw $13 billion in combined net outflows, ETFs roared back to the tune of nearly $30 billion in April inflows, bringing the YTD total ETF inflows to $93.5 billion. A comparison with last year’s pace shows some work still to be done – at this time in 2017, we had $176 billion in net new flows.

Rates Rising, Bond Prices Down, but Fixed Income ETF Flows Up?

Despite the U.S. 10-Year Treasury hitting the much watched 3% mark, investors piled more than $15 billion net into fixed income ETFs in April – the largest monthly inflow for the category since October 2014. Meanwhile, first-quarter earnings season kicked off in April, with more than half of the S&P 500 Index reported as of month-end. 79% of those companies beat Wall Street earnings expectations, helping to stabilize U.S. equity performance and turn around U.S. equity flows materially during the month.

<b>Figure 1: Fixed Income Flows Pave the Way for an ETF Flow Rebound During April</b>

Small Caps Play Defense and ETF Investors Take Note

Volatility is back in vogue after an unusually boring 2017. A closer look at these market swings shows that volatility has centered on large caps, while small caps have enjoyed an unusual period of defensive behavior. In fact, volatility among small caps relative to large caps has never been this low in the history of the CBOE Russell 2000 Volatility Index, which dates back to 2004. With the recent narrow-led market giving way to lofty valuations among the largest companies, investors have been quicker to sell large caps than less bid-up small caps. ETF investors have been a part of this trend – trailing 3-month small-cap flows relative to large caps hit an all-time high at the end of April.

<b>Exhibit 2: Small-Cap Volatility Declined, Drawing Interest Relative to Large Caps</b>

Sector ETFs Suffer in April

Sector ETFs in aggregate experienced their worst month since February 2016, with net outflows of more than $2.5 billion. What gives? April saw some tough headlines in several sectors – bellwether Industrials suffered from fears of rising rates, childhood favorite Toys R Us went bankrupt, and Facebook’s data privacy setback deepened worries that had already spread across the technology sector. Stories like these weakened risk appetite in their respective industries. Despite a strong April for the energy equity sector, with energy stocks in the S&P 500 averaging a more than 10% upward move, flows did not follow performance. That compounded the disappointment for sector-specific ETFs.

<b>Figure 3: Sector ETFs Post Worst Month Since 2016 as Energy Flows Do Not Follow Performance</b>

A Banner Month for Fixed Income

Fixed income ETFs saw net buying in several areas: investment-grade, high yield, short duration, long duration, you name it. High yield finally got back on track, tacking on more than $1 billion in net inflows after shedding $5 billion during the first quarter. However, the biggest story was ultra-short duration ETFs, which took in nearly $5 billion in net new flows during April alone. Through the first four months of the year, this ultra-short category has raked it in, with net new flows of more than $13 billion, already exceeding annual totals since the category’s inception back in 2007. These numbers show that investors were quick to take advantage of a wonderful income opportunity presented by the sharp upward movement in short-term Treasury yields.

<b>Figure 4: Rise on the Short-End of the Curve Yields Record Flows for Ultra-Short Duration ETFs</b>

Commodity ETFs Finally Garner Flows

Geopolitical tensions and inflationary pressures brought prices for certain commodities such as oil to multi-year highs, and ETF flows have followed performance. Commodity ETFs saw slightly more than $2 billion in April inflows, the highest monthly total in more than a year. Precious metal ETFs took in most of these flows – Figure 5 details a strong start to the year for gold ETFs, already smashing 2017’s full year net new figure. Category flows are enjoying an annual pace not seen since 2009. With 2017’s global synchronized growth story being challenged so far in 2018, gold may have more room to run.

<b>Figure 5: Year-to-Date, Gold ETFs Have Already Seen More Interest than During All of 2017</b>

Sell in May and Go Away? Not in the Land of ETFs

Debates have raged for years about whether equity market performance is influenced by the seasons. Could lighter trading volumes and investor vacations during the summer months actually fuel selling? Not according to ETF investors – as they have averaged $16 billion in net flows over the past five years in the month of May, and last year May brought in over $30 billion. Let’s watch and see what May 2018 has in store.