The market sell-off in December was the signal for a headlong rush towards sovereign bonds on the part of ETF investors, according to data analysed by analysts at Societe Generale (SG).
The SG analysis shows that fixed-income ETFs saw an all-time high monthly inflow of $22bn in December at the same time that the equity markets headed into revers eon the back of geopolitical tremors and market instability.
SG said the all-time high was mainly driven by a record creation of US and European short-duration government bond ETFs totaling $15.7bn.
"The search for safe-haven assets also benefited gold exposures," the analysts said. "By contrast, investors continued to exit investment grade and high yield corporate bond exposures as well inflation-linkers."
However, despite the market worries, equity ERTFs still saw net creations totalling $32.5bn in December (compared with a monthly average figure from the past three years of $23.6bn. "Echoing the 2018 trend, US and EM benchmarks were the most in demand in December, while Europe and Japan ETFs were sold off."
However, in line with the rush to bonds, the equity flows were much more towards defensive sectors and thematics.
"In December, ETF primary flows showed a clear preference for defensive over cyclical sectors," the analysts wrote. "Consumer staples and utilities equity sector ETFs were the most in demand as was the case over the year."
Financial equity ETFs suffered record outflows, bringing cumulative net redemptions to $9bn in 2018 on that exposure. The exception was the energy sector ETFs which posted the largest inflows ($644m) while the MSCI world energy sector index registered the worst return over the month (-9.8%) in line with the WTI oil price.
When it came to the factors in vogue in December, it was unsurprisingly the value factor which was in demand.
"The rush on Value ETFs observed in the past months persisted in December and led to record $7bn monthly creations," said the analysts.
Value ETFs was the top factor exposure in absolute terms in 2018, with $22.4bn total inflows, just below small caps indexations. Yield and low volatility ETFs also gathered high interest over the month.
On the contrary, momentum factor ETFs saw large outflows and multi-factor ETFs had their first outflows in more than one year.
Interestingly, there was a split here between Europe and the US. While value saw $7.5bn of net creations in the US, in Europe it saw net redemptions of $0.5bn.
The full-year picture
For 2018 as a whole, inflows for US and European domiciled ETFs stood at $361bn in aggregate, below the figure for 2017 of $556bn, an all-time high. Compared to last year's record prints, US ETFs reported a 32% year-on-year drop while the year-on-year decline reached 50% for their European rivals.
By equity sector, financials reported the largest annual outflows, followed by consumer discretionary. Meanwhile, health care and telecoms gathered the bulk of inflows. The analysts said that notably a U- turn on IT sector ETFs occurred in August 2018 and led to $6.7bn outflows, after $8.2bn collected in the first half of the year.
"By contrast, demand for factor ETFs was strong and all categories posted net creations," they concluded. "In absolute terms, small caps, value, growth and yield strategies captured the largest inflows, although appetite for multi-factor, quality (including quality income) and low volatility was stronger in relative terms."