Hi! In this week’s ETF Wrap, you’ll find out where the money flowed in the first half of 2022 and which areas are being shunned by investors.

For example, high-yield bond ETFs could end up with their largest outflows on record in the first six months of a year, according to Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors.

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Investors aren’t crowding into exchange-traded funds like they were in the first half of last year, with inflows falling sharply amid fears a recession could loom amid persistently high inflation .

“The first half of 2022 is largely a two-quarter story,” Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, said over the phone. “In the first quarter, we were still moving at a really record pace, and then all of a sudden the market sentiment changed.”

U.S.-listed ETFs have gathered around $223 billion this year through June 28, a “significant deceleration” from the first and second half of 2021, Bartolini said. ETFs attracted about $389 billion in the first six months of last year, he said, with 2022 inflows so far down about 43% from that level.

ETF inflows are on pace in the “slowest” first half since 2020, according to Bartolini.

The slowdown “speaks to some of the more tactical ETF users,” who have less appetite for risk in a market that is trending lower, he said. Sector ETFs, which can be used to “express a very tactical view,” collectively saw outflows of $13.3 billion in the second quarter through June 28. That puts them on track for one of their worst quarters after the fourth quarter of 2018, he said.

ETFs focused on the financial sector suffered “significant” capital outflows in the second quarter, with investors withdrawing around $15 billion so far through June 28, according to Bartolini. While financial companies such as banks stand to benefit from rising interest rates, investors fear that their “cyclical” nature will make them susceptible to an economic downturn.

Financial Select SPDR Fund XLF Shares,
-1.12%,
which tracks an index of S&P 500 financial stocks, have fallen nearly 19% this year through June 29, according to FactSet data. This compares to a decline of nearly 20% for the S&P 500 SPX,
-1.10%
over the same period, which put the benchmark US equity index on track for the worst first half since 1970, according to Dow Jones Market Data.

In outflows from other sectors in the second quarter, investors withdrew about $3.1 billion from energy ETFs as of June 28, Bartolini said. “I don’t quite understand,” he said. “I think it’s profit taking” after the sector’s strong gains so far this year.

As the stock market crashed, Energy Select Sector SPDR Fund XLE,
-2.16%
climbed nearly 32% in 2022 through Wednesday as oil prices soared. So far this quarter, the energy ETF has fallen around 4.4% through Wednesday, outperforming the 15.7% decline in the S&P 500 over the same period.

Lily: Energy ETFs most unloved over ‘remarkable’ gains as stock market growth bets head for worst first half in history

While sector ETFs suffered outflows in the second quarter, they still attracted around $4.5 billion in net inflows this year through June 28, according to Bartolini. He said health care – “a largely defensive area” of the market that tends to outperform during an economic downturn – saw the most inflows among sectors this quarter as well as so far this year.

Meanwhile, financials-focused ETFs saw the largest outflows in 2022 through June 28, followed by funds investing in consumer discretionary, Bartolini said. Shares of Consumer Discretionary Select Sector SPDR Fund XLY,
-1.74%
have plunged about 32% this year through Wednesday.

Lily: Consumer spending slows sharply as inflation hits home

Record high yield ETF exits?

Fixed income sold with stocks in 2022, damaging traditional portfolios of 60% stocks and 40% bonds amid rising interest rates and the highest inflation for about 40 years.

Investors who bought Treasury Inflation-Protected Securities, or TIPS, were also hurt by the rising rates. iShares TIPS Bond ETF TIP,
-0.02%
lost about 9% on a total return basis this year through Wednesday, compared to a 10.6% loss for the iShares Core US Aggregate Bond ETF AGG,
+0.50%,
according to FactSet data.

The TIPS fund is doing better than the broader bond market, “but it’s certainly not giving positive returns in an inflationary environment,” Elisabeth Kashner, director of global fund analysis at FactSet, said over the phone. “ADVICE has a duration, so it has a high sensitivity to interest rates, although it has an element of inflation protection.”

FACTS


Rising rates hurt bond values, with long-dated securities being particularly vulnerable. Meanwhile, investors fear hitting the yield on risky corporate debt in a slowing U.S. economy.

ETFs that invest in high-yield corporate debt, or so-called junk bonds, saw “massive” outflows in the first half of this year through June 28, with investors withdrawing around 15, $9 billion, according to Bartolini. That leaves high-yield ETFs heading for their worst first half in history, he said.

The performance of junk bonds has been dismal.

The iShares iBoxx $ High Yield Corporate Bond ETF HYG,
-0.10%
posted a loss of 13.7% on a total return basis in the first half of this year through Wednesday, according to FactSet data. The ETF is on course for potentially its worst first-half performance on record.

Lily: Major bond ETFs on pace with worst first half to year on record

High-yield bond funds suffered the largest outflows among U.S.-domiciled ETFs this year through June 27, followed by ETFs focused on U.S. financials and U.S. inflation-linked government debt, according to Kashner from FactSet.

The fourth largest outflows over the same period came from equity ETFs targeting the broader developed Europe market, and the fifth largest outflows so far in 2022 came from consumer discretionary funds Americans, according to his research.

The biggest influxes of 2022

According to Kashner, the top five U.S.-domiciled ETF categories for inflows through June 27 are primarily stocks, but also include very short-term Treasuries. She found that ETFs that buy large-cap U.S. stocks attracted the most capital during this period, followed by equity funds focused on high dividend yield and the broader U.S. market.

The fourth largest inflows were captured by fixed-income ETFs that invest in very short-dated Treasuries, with exchange-traded funds targeting large-cap U.S. stocks ranking fifth so far in 2022. , according to Kashner’s research.

“Right now, one of the things we like is a value and a min vol and a bar,” Lukas Smart, head of US iShares sustainability and factor strategies at BlackRock, said over the phone.

Shares of the iShares MSCI USA Value Factor ETF VLUE,
-1.12%
are down 16.6% this year through Wednesday, according to FactSet. The iShares MSCI USA Min Vol Factor ETF USMV,
-0.47%,
which is designed to provide a portfolio of US stocks with minimal volatility, fell 13% over the same period.

“Min vol” is an option for investors who want to stay invested in stocks in “an uncertain environment with a high degree of inflation,” Smart said.

As usual, here’s your rundown of the best and worst performing ETFs from the past week through Wednesday, according to data from FactSet.

Good…
Best performers %Performance

VanEck Oil Services ETF OIH,
-2.65%

7.7

ETF VanEck Rare Earth/Strategic Metals REMX,
-0.33%

5.1

United States Oil Fund LP USO,
-3.14%

5.0

Tortoise North American Pipeline Fund TPYP,
-1.02%

4.4

FlexShares Morningstar Global Upstream Natural Resources Index Fund GUNR,
-2.20%

4.3

Source: FactSet data through Wednesday June 29, excluding ETNs and leveraged products. Includes ETFs traded on the NYSE, Nasdaq and Cboe of $500 million or more.

…the bad
New ETFs
  • Ionic Capital Management announced on June 29 that it is launching the actively managed Ionic Inflation Protection ETF (CPII). The new fund will invest in consumer price index inflation swaps, US interest rate swap options and short-dated TIPS.

  • NightShares announced on June 28 the launch of two exchange-traded funds that attempt to “capture the value of systematically buying at the close and selling at the open.” The new funds are the NightShares 500 ETF NSPY,
    -1.26%
    and the NightShares 2000 NIWM ETF,
    -1.99%.

The weekly ETF reads as follows: