ESG demand declines

ESG demand declines

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First-quarter data show strong performance for cyber security, gold, and broader commodity funds. Flows into ESG exchange-traded funds aiming for better environmental, social, and governance outcomes amounted to just €13.5 bn in the first quarter, less than half of the €28bn that went into them in Q4 2021, European data shows.

Only 30.3 percent of total money put into ETFs in Europe in Q1 went into ESG funds, down from the 78 percent record high in Q4 2021.

Thematic ETFs, like ESG portfolios and others that tend to come with a quality growth bias, have seen demand fall amid the disastrous performance of recent months. Flows into these funds totaled €0.59bn in Q1 2022, down from €2.2bn in the previous quarter.

This was the first quarter in nearly three years in which thematic ETFs did not attract at least €1bn of net inflow.

That doesn’t mean all such ETFs have been disappointing. With Russia’s incursion into Ukraine highlighting the need for renewable energy, the iShares Global Clean Energy UCITS ETF took in €457mn in Q1. The iShares Agribusiness UCITS ETF took in €418mn, and the iShares Digital Security UCITS ETF and L&G Cyber Security UCITS ETF took over €200mn in Q1.

In recent months, there have been exciting performance differentials between the two, with the iShares Digital Security UCITS ETF falling 8.3 percent during Q1 and the iShares Digital Security UCITS ETF finishing the quarter broadly unchanged.

Investors have also poured into gold funds and broader commodity plays, with gold exchange-traded products at Invesco and iShares raking in close to €5bn between them.

While the behavior of ETF investors often tends to reflect what is happening in both the active management space and broader markets, it has not always been the case in Q1 of this year.

With the sheer scale of inflation being difficult to ignore, investors in ETFs and other funds have made some pretty intuitive moves, with a hunger for quality growth funds and fixed income allocations appearing to fall off. But this has not resulted in out-and-out selling of ETFs as some investors still favor even those subsectors that look progressively more pressured.

European Bond ETF sales dropped from €8.3bn in the final quarter of 2021 to €5.2bn in the first quarter of 2022. But the point that this was a positive figure juxtaposes with data from other areas of the fund market. Investment Association data shows that UK investors pulled £1.7bn net from open-ended fixed-income funds in the first two months of 2022, predictable given the growing sell-off.

Several bond ETF categories have seen net outflows over Q1 in Europe, from US dollar inflation-linked bond funds to high-yield bond funds.

A small number of funds saw sizeable outflows, from short-term plays such as the iShares $ Treasury Bond 1-3yr UCITS ETF and Pimco US Dollar Short Maturity UCITS ETF, to inflation-linked and high-yield bond funds. Funds that saw outflows included the iShares $ High Yield Corp Bond UCITS ETF, iShares Global High Yield Corp Bond UCITS ETF, and iShares Fallen Angels High Yield Corp Bond UCITS ETF, which aims to invest in downgraded debt that could bounce back. Investors also departed what was a popular fund in 2021 — the iShares China CNY Bond UCITS ETF.

While it might appear a surprise to see investors pulling out of high yield, a fixed income subsector often viewed as more resilient against inflation and rising rates, it could highlight worries that a recession is more probable. The same thinking might explain the never-ending call for US government bonds. US bond funds were the most popular fixed-income categories during Q1, and other government bond ETFs also stayed popular.

The majority of fixed-income investments into established market bond ETFs suggest that US assets will always be viewed as a safe haven for investors.

This might also explain the flight from Chinese bond products. Here we also see how the rise in interest rates in the US, with its negative effect on bond prices, makes the search for yield away from developed countries less attractive.