Turbulent Markets Spark ETF Outflows in April
U.S. ETFs endure their first month of outflows since 2019 as stocks and bonds both retreat.
U.S. exchange-traded funds collectively bled $4.3 billion in April 2022, marking their first month of outflows since August 2019. Stock ETFs--whose strong showing in 2021 powered a new annual flows record for ETFs--saw a $19.2 billion exodus in April, and tame inflows for fixed-income and commodities funds weren't enough to push overall ETF flows into positive territory.
Investors lost confidence in the market's resiliency after a tough start to the year. The Morningstar Global Markets Index, a broad gauge of global equities, slid 7.88% in April, marking its worst month since March 2020. Meanwhile, bonds continued to reel. The Morningstar US Core Bond Index, which tracks U.S. government bonds and investment-grade corporate debt, retreated another 3.67% in April. The bond benchmark has posted losses each month this year, which have added up to a 9.45% year-to-date decline. This has been the benchmark's worst four-month stretch in its 22-plus years of recorded performance.
Here, we'll take a closer look at how the major asset classes performed last month, where investors put their money, and which corners of the market look rich and undervalued at month's end--all through the lens of ETFs.
Few Safe Havens
Exhibit 1 shows April returns for a sample of Morningstar Analyst-rated ETFs that serve as proxies for major asset classes. A blended global portfolio sunk 6.25% in April, as its three ETF holdings finished in different shades of red. Vanguard Total Bond Market ETF BND shed 3.97% in April. Its international counterpart Vanguard Total International Bond ETF BNDX held up a bit better with 3.00% downturn. These funds have moved in reverse all year as the Federal Reserve has indicated more interest-rate hikes lie ahead in the face of stubborn inflation. Investors expect a half-point interest rate increase when the Fed convenes on Wednesday, May 4.
The blended portfolio's stock sleeve weighed on returns even more than the fixed-income components. Vanguard Total World Stock ETF VT fell 8.10%--its worst month since the coronavirus-fueled drawdown in March 2020. International stocks held up a bit better than their domestic peers but still had troubles. Vanguard Total International Stock VXUS slid 6.49%, as turbulent markets affected both developed- and emerging-market stocks. After similar April declines, emerging- and developed-markets foreign stocks are neck and neck so far this year. IShares Core MSCI Emerging Markets ETF's IEMG posted a 12.54% pullback for the year to date, with IShares MSCI EAFE ETF EFA dropped 12.77% over the same span.
It was a difficult month for U.S. stocks. IShares Core S&P Total U.S. Stock Market ETF ITOT booked a 9.03% drop in April and has lost 13.92% for the year to date. The specter of more pronounced interest-rate hikes has spooked stock investors. The Russia-Ukraine conflict and China's pandemic-induced lockdown added a wrench, as both may obstruct the global supply chain and drive up inflation further. Investors seemed to have come to terms with the uncertain economic outlook after a calm March, but April's showers indicate that they may have underestimated the troubles that lie ahead.
Growth stocks bore the brunt in April. Vanguard Growth ETF VUG tumbled 12.88% in its worst month since October 2008. Growth stocks can be more sensitive to interest rates because their anticipated cash flows may lie further in the future. Some firms’ individual woes contributed to the tumultuous month as well. Netflix NFLX lost almost half of its value in April after it announced its subscriber count dropped in the first quarter. Amazon.com AMZN slid 23.75% after it reported losses for the first time in seven years and shared lower-than-expected guidance for the second quarter.
April was kinder to value stocks, but Vanguard Value ETF VTV still posted a 4.79% decline. Some of the market's stalwarts stabilized the portfolio. Top-10 holdings Johnson & Johnson JNJ, Procter & Gamble PG, and Exxon Mobil XOM all finished the month in the black. Value stocks have held up much better than their growth peers over the past few months; VTV outperformed VUG by 18 percentage points for the year to date through April.
The sectors that tend to be more value-oriented led the way in April. The consumer staples sector lived up to its reputation as a defensive corner of the market. Solid performances from Coca-Cola KO, Altria MO, and Kimberly-Clark KMB helped it conclude April as the lone sector in positive territory. Energy stocks pulled back for the first month this year as oil prices flattened out in April, but Energy Select Sector SPDR ETF's XLE 1.69% April decline still ranked second among State Street's suite of sector ETFs. Growth-oriented sectors were not as resilient. Technology Select Sector SDR ETF XLK, Communication Services Select Sector SPDF ETF XLC, and Consumer Discretionary Select Sector SPDR ETF XLY ranked in the bottom three of April returns within its suite of sector ETFs.
While value and growth stocks have seen divergent performance so far this year, results have been similar up and down the market-cap spectrum. IShares Core S&P 500 ETF IVV, iShares Core S&P Mid-Cap ETF IJH, and iShares Core S&P Small-Cap ETF IJR all retreated between 11.6% and 13.1% for the year to date. According to Morningstar's price/fair value ratio, IJH traded at an 18% discount at the end of April. However, the best value of all may reside overseas; IEMG closed out the month 26% below its fair value.
Within the iShares suite of single-factor strategic-beta funds, only iShares MSCI USA Minimum Volatility Factor ETF USMV traded at a premium at the of April. This fund has found its stride after starting the year with back-to-back months of underperformance. After relatively strong March and April returns, this fund has led the Morningstar US Market Index by 4.99 percentage points, delivering on its low-volatility objective.
Stock ETFs See Rare Outflows
ETF Investors slammed on the breaks last month. After raking in $91.4 billion in March, ETFs bled $4.3 billion in April--their first month of outflows since August 2019.
Stock ETFs saw $19.2 billion flood out their doors, the most since May 2019. Investors' patience with the U.S. market seemed to dry out. Large-blend funds alone lost $29 billion in April, as three S&P 500 trackers--IVV, SPDR S&P 500 Trust SPY, and Vanguard S&P 500 ETF VOO--collectively tallied $32.5 billion of outflows. Each of these three funds clocked top-five inflows in March.
Not all equity ETFs saw outflows. Dividend-focused ETFs were a popular choice in April. SPDR S&P Dividend ETF SDY, Schwab U.S. Equity Dividend SCHD, and iShares Core High Dividend ETF HDV all notched inflows in excess of $1 billion and helped drive the large-value Morningstar Category's $8.8 billion April haul, tops among all categories. These funds have stacked up well compared with the broad market--especially HDV, whose lofty stakes in consumer staples, energy, and utilities stocks helped it outpace the Morningstar US Market Index by 17.28 percentage points for the year to date through April.
Niche, tactical stock funds posted a solid month of flows as well. The trading--leveraged equity category pulled in $5.2 billion in April--the second month this year it eclipsed the $5 billion monthly flows mark. Direxion Daily Semiconductor Bull 3X ETF SOXL and ProShares UltraPro TQQQ--funds that offer triple exposure to tech-focused indexes--stood out last month, collecting $2.3 billion and $1.9 billion, respectively. The indexes that these funds track have both tumbled so far this year. Investors in these ETFs seem to be channeling the proverbial "buy the dip" mentality, trying to capitalize on these benchmarks' recent woes.
Flows followed performance in the realm of sector ETFs last month. Funds that zero in on healthcare, utilities, and consumer staples stocks--historically-defensive sectors that have outpaced the broad market so far this year--all notched healthy April inflows. Meanwhile, financial sector ETFs bled $6.2 billion last month. Financials Select Sector SPDR ETF XLF lost $4.3 billion alone after falling further than the broad market in back-to-back months. Industrials, communications, and tech funds all posted April outflows as well.
Fixed-income funds posted a modest $8.3 billion inflow in April. Bond ETF investors took a conservative approach during the month, as has been the case for most of the year. Ultrashort bond funds raked in $5.2 billion last month and have collected $17 billion for the year to date--third-most among all Morningstar Categories. This indicates investors may aim to dial back their interest-rate risk ahead of predicted interest-rate hikes. Indeed, the long-term bond category leaked $327 million last month. Investors have seemed to eschew credit risk as well. Short-, intermediate-, and long-term government bond funds collectively added $4.9 billion in April, while riskier high-yield bond ETFs saw another $4.4 billion exit their doors.
Flows into commodities ETFs slowed down from the previous three months but remained positive in April. The commodities-focused and commodities broad basket categories collected $1.3 and $1.0 billion last month, respectively. Investors have noted these funds’ stellar performance as equity and fixed-income offerings have languished. For the year to date through April, the commodities-focused category average climbed 14.38%, and the commodities broad basket category average notched a 29.24% return.
The Big Three Shrink
The top three ETF providers--iShares, Vanguard, and State Street--were not immune from the outflows that characterized April. All three firms felt the pain of investors’ exodus from their S&P 500 ETFs. IVV, VOO, and SPY all suffered outflows that ranged from $10 billion to $12 billion. IShares saw the biggest outflows of the trio, as investors continued to flee iShares iBoxx $ High Yield Corporate Bond ETF HYG, which has bled $7.2 billion for the year to date.
Some firms that specialize in more tactical ETFs squeezed out positive inflows last month. Direxion rode SOXL's tremendous month to a $2.6 billion haul in April, which led all ETF providers. This fund offers triple daily exposure to the IC Semiconductor Index, a market-cap-weighted portfolio of the 30 largest U.S. semiconductor firms. After advancing 118.4% in April 2021, SOXL lost 43.51% of its value in the first quarter of 2022. Investors loaded up on this fund in hopes of a rebound, but they were early to the party; SOXL retreated another 42.65% in April alone. Time will tell if investors continue to double-down on semiconductors and add to the $6.1 billion that Direxion has absorbed so far this year.
VanEck, another firm with a full roster of narrowly focused ETFs, collected $1.9 billion last month. Investors shook their heads yes to VanEck Semiconductor SMH, which led the way with a $1.3 billion April collection. VanEck Agribusiness ETF's MOO $733 million inflow helped the cause as well. This fund has turned in relatively strong year-to-date performance, as rising commodity prices have pushed its farm-focused holdings ahead.
Cannabis Funds Have Room to Grow
The fair value estimate for ETFs rolls up our equity analysts' fair value estimates for individual stocks and our quantitative fair value estimates for stocks not covered by Morningstar analysts into an aggregate fair value estimate for stock ETF portfolios. Dividing an ETF's market price by this value yields its price/fair value ratio. This ratio can point to potential bargains and areas of the market where valuations are stretched.
ETFs that aim to leverage the legalization of cannabis or other drugs claimed eight of the 10 spots on the cheaper half of Exhibit 6, which features funds that traded at the lowest prices relative to their fair value at April's end. These funds looked revitalized when their performance picked up in March, but the comeback was short-lived. Each fund on the cheaper half of Exhibit 6 that's at least one year old tumbled at least 60% over the 12 months through April.
A different kind of plant-themed ETF resumed its post on the pricier half of Exhibit 6 in April: iShares MSCI Global Agriculture Producers ETF VEGI. This fund, which includes stocks whose operations center around the production of various crops, rode soaring commodity prices to an 11.18% year-to-date return. As a "producer ETF," VEGI can offer backdoor exposure to the broad commodities market. But investors should still expect such funds to behave more like stock funds than commodities portfolios more often than not.
Over one year removed from the meme-stock craze of early 2021, the fervor that surrounded many Reddit rocket ships has died down. Roundhill MEME ETF's MEME spot on the cheaper half of Exhibit 7 is a testament. Since its December 2021 inception, this equally weighted portfolio of retail darlings like GameStop GME and BlackBerry BB shed over half of its value and trailed its category index by 27.69 percentage points. MEME's precipitous decline illustrates the risks that come with chasing trendy, flavor-of-the-day ETFs.
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