Flash Flows

Looking Through a Glass Onion

In 2022, the standard 60/40 portfolio had its second-worst year ever, as both stocks and bonds fell double digits. Yet, ETFs had their second-best year of inflows ever — taking in over $615 billion. Value (+$114 billion) and Dividend (+$72 billion) funds posted their best years ever. Bond ETFs, led by a record $125 billion of inflows into government funds, just missed taking in $200 billion for the third straight year.


Head of SPDR Americas Research

A glass onion is a British slang word for a monocle, and looking through one is a metaphor for over analyzing actions while assuming some hidden meaning behind them.

The term became part of pop-culture after the Beatles’ 1968 song with same title mocked people who overanalyzed their lyrics. Who is the Walrus? The recent Netflix movie, Glass Onion: A Knives Out Mystery, has ushered it back into the pop culture lexicon.

But Daniel Craig and his Detective Benoit Blanc are not the only ones to look at things with an extreme attention to detail in search of the real reason something happened. Investors are guilty as well.

With stocks and bonds both down double digits, pushing the standard 60/40 asset allocation portfolio to its second-worst year ever,1 investors are peeling back the layers of an economic and fundamental onion, seeking the right narrative to justify such poor performance.

Despite the negativity within asset class returns in 2022, flows were still strong — with some areas posting records.

Seven Segments Set Records in 2022

Investors continued to plow capital into ETFs in December, with funds taking in $48 billion. Although this was the lowest inflow of the quarter, it was enough to push Q4 inflows to $197 billion — the second-highest total ever for any fourth quarter, but still $70 billion shy of the record inflows of Q4 2021.

As a result of the strong close to the year, ETFs notched their second-best year ever, taking in over $615 billion — the second straight year of more than $600 billion. And across the 36 markets we track, these seven areas had annual record-setting flows in 2022:

  • Defensive sectors: $26 billion, 77% more than their 2018 record and nearly $56 billion more than the cyclicals — the largest differential ever as the latter had $31 billion of outflows in 2022 as defense was sought
  • Dividend ETFs: $72 billion, 68% more than 2021’s record. Dividend-focused funds now have had inflows for 26 straight months, one shy of a record
  • Traditional US Value: $113 billion, 28% more than the 2021’s record $88 billion. This category benefited from the flows into dividend funds (a style categorized as value)
  • Ultra-short government bonds: $73 billion, 80% more than the prior record set in 2018, another time period that saw rates rise and global markets fall
  • Smart Beta: $94 billion, 33% more than the record set in 2019, a byproduct of the strength of flows into dividend funds as they made up 72% of all 2022 smart beta flows even though they represent 54% of all smart beta assets
  • Active ETFs: $106 billion, 22% more than 2021’s record $87 billion, fueled by active equity ETFs that were previously converted from mutual funds as well as those that provide defined outcomes through the use of options, the latter of which could be considered an alternative strategy
  • Active equity: $86 billion, 100% more than the $43 billion from 2021

Record Category Annual ETF Fund Flows

Record Category Annual ETF Fund Flows

Investors Head Overseas

Within equities, US exposures — given the sheer size of the market — continued to take in the majority of inflows with $19 billion in December. Yet, all other major geographic regions also had inflows on the month and quarter. And on relative basis, non-US markets saw higher inflows as percent of their start-of-month assets (1.1% vs. 0.5% for US funds), as investors began to look overseas for opportunities given better valuations than the US.

There was depth to these overseas flows as well, something that was missing in total ETF flows as only 57% of ETFs had inflows in 2022. But, 80% of International-Developed ETFs had inflows in December, four percentage points above the historical median. Emerging market exposures had roughly the same as their historical median of ~63%. Meanwhile, 61% of Single-Country funds (vs. 54% historically) had inflows in December. And even though China-focused ETFs made up roughly half of the total single-country flows in December, 60% of countries (when grouped together) had inflows last month.

Pairing the positive flow figures and strong relative rates (as measured by the percent of start-of-month assets) shows a conviction to look overseas. This is occurring right as the streak of US stocks outpacing non-US stocks for 55 consecutive rolling 12-month periods has come to end. Non-US equities beat US equities by 2.7% in 2022.2

Equity Geography Flows

Equity Geography Flows

Bonds Post Big Inflows

The strength of fixed income inflows were part of the reason the Q4 2022 headline total was so impressive. The $73 billion into bond funds was the most on record for any fourth quarter — well above the most recent seven-year Q4 average of +$41 billion. In fact, inflows for Q4 2022 rank fourth-most for any rolling three-month period.

The impressive bond inflows were driven by record-setting flows into government bond ETFs, as those funds took in $8 billion for the month and $23 billion for the quarter. Yet, the majority of those flows went into short-term exposures. Those shorter duration funds took in $5 billion and $11 billion, respectively.

High yield supported Q4 figures, taking in $11 billion — the most ever for any Q4 and the fifth-most for any rolling three-month period. Yet, amid the rout in risk-on assets to close out the year, high yield witnessed $2.6 billion of outflows in December to finish 2022 with $4.5 billion of outflows, the worst year on record after 2018.

Fixed Income Flows

Fixed Income Flows

With a Reason in Hand, What’s Next?

In the words of Det. Blanc, while a glass onion seems densely layered, mysterious, and inscrutable, the center is in plain sight. Turns out the culprit of poor performance is right in front of us! No need to theorize about how the global pandemic impacted societal behaviors, supply chains, or consumer habits. Or how a fraught political arena impacted legislative efforts all across the globe, and specifically in the US. And, while noteworthy on humanitarian level, there is no need to scrutinize elevated geopolitical tensions from China or the Russia-Ukraine war.

The center of the market’s glass onion — and the reason why nearly $30 trillion of wealth was wiped out in 20223 — is interest rates. Rates are the lead pipe, rope, and revolver all at the same time in this real life game of Clue. Any other conclusion is an illusion.

It’s all there! The aggressive monetary policy actions from multiple central banks pushed global interests to financial crisis era highs and bond prices fell. For stocks, it’s all about valuations. Rising rates increased the discount rate for firms’ future cash flows, pushing valuations lower.

If rising rates were to blame in 2022, it’s reasonable to believe they will be disruptors again in 2023 — at least initially. This is why we view the new year as a great balancing act — and why investors will want to strike a balance between offense and defense within equities while targeting total return opportunities in ultra-short and high quality short-term bonds.

You can find the full report on December ETF flows here.


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