INSIGHTS

After a year of stable market conditions, volatility ramped up in Q1 2022. Advisors selectively parsed uncertainty, resulting in an imbalance of fee-based flows across mutual funds (MFs), exchange- traded funds (ETFs), and separately managed accounts (SMAs). On the surface, flows played out as one may have expected. However, unraveling each product type by asset class and style reveals important themes and surprises that shaped fee-based flows in the quarter, which seemed to reflect defensive movement as well as creative strategies among advisors to counter the market distress.

The charts below focus on fee-based flow activity in the top 5 and bottom 5 categories based on data from national broker-dealers, which help define distribution strategies over a short- and long-term view within these three top trends:

U.S. equity continued to drive impressive growth in ETFs and SMAs.
Taxable and muni fixed income drove down MF growth with significant outflows.
Alternatives led MF growth and drove a rebound in active ETFs .

Figure 1: Top 5 Categories by Net Sales (Fee-Based): Q1 2022

U.S. Equity Shows Impressive Growth in SMAs and ETFs

Equity markets faced an unpredictable outlook to start the year as an array of macroeconomic factors led to heightened volatility. Despite these conditions, significant U.S. equity flows continued to go to ETFs and SMAs. U.S. equity ETFs accounted for 18% of net sales, while U.S. equity SMAs led all categories with 32% of net sales and posted a record high in sales over the past five years. The majority of U.S. equity SMA sales were in active strategies, but notable growth was seen in direct index strategies, which accounted for 21% of U.S. equity sales to SMAs. SMAs also saw gains in international/global equity strategies.

Drilling down by style, U.S. equity SMA sales were driven by large cap value, which led all other investment styles with 13% of net sales. Large value was also a consistent top style in smart beta ETFs and index ETFs. While a shift from large growth to large value remains underway, some advisors straddled between growth and value, and opted for large cap core SMAs – the second-best selling investment style with 12% of net sales.

Significant Mutual Fund Outflows Seen in Taxable and Muni Fixed-income

Rising rates continued to create instability in the fixed-income market, causing MF growth to deteriorate. MFs saw significant outflows ($40 Billion) from municipal and taxable fixed income – the first outflows to both MF categories since the onset of COVID-19 in Q1 2020. Municipal fixed income MFs showed an 8% decline in net sales, while taxable fixed-income MFs took the brunt of outflows, with a decline in net sales of 17% in the quarter. This was a sharp reversal from last year when taxable fixed-income MFs accounted for the highest percentage of net sales.

Figure 2: Bottom 5 Categories by Net Sales (Fee-Based): Q1 2022

Multi-sector bond, intermediate core plus bond, and high-yield bond saw the largest outflows, a trend consistent for many other taxable fixed income styles outside of the bottom 5 shown in the chart. The only taxable fixed-income MF style to see considerable inflows was bank loan, which offers investors a safe haven against a rising rate environment using floating yields.

Alternatives Led MF Growth and Drove Rebound in Active ETFs

With increased risk in the equity and fixed-income market, alternatives, which tend to have low correlation with equities and fixed-income, gained considerable momentum to start the year. This was reflected in significant sales in alternative MFs and ETFs. MFs were in outflows across most major asset classes, with the exception of alternatives, which represented 10% of net sales in the quarter. Alternatives saw slightly higher sales to ETFs with 11% of net sales.

Figure 3: Percent of Net Flows by Asset Class - National Broker Dealers - Q1

When analyzing ETF flows by management type, it was active ETFs that garnered the majority of alternative sales to ETFs. Active ETFs accounted for 61% of total ETF sales, with the more thematic strategies underpinning growth in the category. This was also – the first quarterly increase to active ETF sales since Q1 2021 – an important shift to monitor considering active ETF growth has largely been concentrated around taxable fixed income.

Figure 4: Active ETF Net Sales By Asset Class

In terms of styles, commodities broad basket was the top style in active ETF sales and the alternative MF category. Commodities broad basket, which can include exposures to metals, energy and grains, has benefited from rising inflation as prices surged and have remained relatively high. In addition to the commodities-fueled growth in the alternatives category, the “ultra-short” municipal bond segment also saw tremendous interest based on Q1 inflows. In unpacking the data, this was driven by one product that enjoyed disproportionate home-office model sales during the quarter.

Environmental, social governance (ESG) strategies, while a relatively minor percentage of inflows, continued to show sales growth, underscoring the category’s resiliency despite the market turbulence.

Close Look at Active ETFs by Style and Top Products

Fund Flow Rotation Underway

The data seem to suggest that a rotation of fund flows is underway, with the recent market environment challenging traditional asset allocation strategies. While these positions may be tactical in nature, fund flows in Q1 2022 also reveal accelerating trends that distribution professionals would be wise to monitor in 2022 and beyond, including trends in active ETF and SMA strategies, categories that thrived over the past quarter.

For more on these trends and what’s emerging, listen to BNY Mellon’s U.S. Distribution Pulse Quarterly webcast.

Scott Anderson

Director of Research, BNY Mellon Growth Dynamics^SM

Don Mam

Research Analyst, BNY Mellon Growth Dynamics^SM

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INSIGHTS

Trends Shaping Fee-based Fund Flow Activity in Q1 2022