US equities and ESG were the flavour of the third quarter of 2022 despite declines in wider-market indices and a worsening economic outlook globally.

A long way ahead of the pack was the iShares MSCI USA ESG Enhanced UCITS ETF (EEDS) which recorded inflows of $5.2bn in the three months to the end of September, according to data from Bloomberg Intelligence.

This is despite returning -5.1% over Q3, slightly better than the -6.3% returned by the S&P 500 over the same period as inflationary and recession fears came back into focus.

It was a similar story for the Xtrackers MSCI USA ESG UCITS ETF (XZMU) and the Xtrackers S&P 500 Swap UCITS ETF (XSXD) which saw inflows of $747m and $742m, respectively.

The JPMorgan US Research Enhanced Index Equity ESG UCITS ETF (JREU) also snuck into the top 10, amassing $572m over Q3. While the UBS ETF Factor MSCI USA Quality UCITS ETF (UBUT) and the Lyxor MSCI USA ESG Broad CTB DR UCITS ETF (USAL) saw inflows of $480m and $476m, respectively.

All benefitted from a brief rally in US stocks from June to mid-August as investors bet inflation may have peaked. The market looked to have bottomed out in mid-June before better than anticipated US inflation figures of 8.5% in July acted as a catalyst for outperformance.

This also acted as a short-term boost for ESG ETFs as institutional investors looked to capture the potential recovery in the stock market.

Since then, however, the S&P 500 drifted into another bear market, falling 16.7% from 16 August to 30 September, as investors continue to price in the risks of higher interest rates on earnings and valuations.

The Federal Reserve recently earmarked another 1.25% rate rise before the end of the year which would take interest rates to 4.5%.

Inflows into global equities also fared well on the Q3 market bounce, with the iShares Core MSCI World UCITS ETF (SWDA) posting inflows of $817m – the fourth highest – and the Vanguard FTSE All-World UCITS ETF (VWRA) recording $666m inflows.

There were also signs investors were looking further afield in the hunt for performance, with the iShares MSCI EM ESG Enhanced UCITS ETF (EDM2) seeing inflows of $788m, the fifth best in Q3.

Away from equities, two corporate bond ETFs rounded off the top three with August marking biggest inflows of investment grade credit since January, according to the Bank of America.

The Xtrackers ESG EUR Corporate Bond UCITS ETF (XB4F) led the way with inflows of $1bn, followed by the iShares $ Corp Bond UCITS ETF (LQDE) which saw $827m inflows.

It came as BlackRock warned the equity rally seen towards the twilight of the summer could fizzle out, leading investors to be more defensively positioned in their portfolio.

There were further signs investors were rotating into 10-year US Treasury bond ETFs amid recession fears and the anticipation that the Federal Reserve will halt its tightening cycle at a lower level than the markets had priced in.

For example, the Invesco US Treasury Bond 7-10 Year UCITS ETF (TRDE) recorded inflows of $523m over Q3, followed by the iShares $ Treasury Bond 7-10yr UCITS ETF (IBTM) with inflows of $512m.

This was a continuation of strong flows at the back end of Q2, where TREX and IBTM saw inflows of $896m and $1.2bn over June, respectively, amid expectations the Fed may slow down its hiking cycle.

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